The Charity Commission has made an admirable attempt at clarifying the parameters that apply when charities consider ESG investing. Their consultation on updated guidance is worth a read not only for those that advise charities, but any trustee seeking to understand how their fiduciary duties might apply to the ESG world.
For the legal nerds among us, even better is the 31-page 'legal underpinning' document attached to the consultation, which provides a thorough analysis of the law as it applies to fiduciaries and charities.
Essentially the Charity Commission describe four main types of investment:
- Financial investment, which might otherwise be described as conventional investing focusing purely on financial return;
- Responsible investment, which is investment for a financial return but which also takes into account the Charity's purposes and values. This type of investment incorporates negative and positive screening;
- Investment for the purposes of furthering the Charity's purposes, with a financial return being possible but not the purpose of the investment. In the Charity Commission's view this type of outlay of funds is not actually an investment at all for the purposes of trusts law, and therefore powers other than the power of investment should be used when making it;
- Mixed-motive investment, which is a combination of financial investment and investment for the purposes of furthering the Charity's purposes. This appears to be aimed more at the impact investing end of the spectrum.
All four types of investment are theoretically possible, so long as the relevant procedures and governance are followed.
As a private wealth lawyer, one of the questions closest to my heart is how the law of private trusts, both in England & Wales and various offshore jurisdictions, can be tweaked or evolve to create a more permissible environment for trustees. It is important that trustees are able to fully embrace this relatively new investment universe, and enabling that could unlock a huge amount of capital for projects that do good.
To date much of the focus has been on how particular clauses can be inserted into trust deeds etc in order to mitigate any concerns around fiduciary risk. See for example Guernsey Finance's excellent guidance here.
However, I wonder whether the approach set out by the Charity Commission provides a clue to how the law might evolve to help facilitate ESG investing. Those impacting the legislative process in the Channel Islands, Isle of Man, Cayman, BVI, Bermuda etc should all take a read.
some trustees felt they are unable to make responsible investments, because they perceive they have an overriding legal duty to maximise the financial returns when investing, regardless of any other consideration