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Responsible investment by universities


Shift abstract

In recent years there has been increased scrutiny of the way in which charities including colleges and universities invest, with that scrutiny often coming from student bodies keen to understand the impact of their institutions’ investment strategies.

In this article James Maloney and Emma James consider how a recent judgment clarifies the legal considerations for investment by these institutions. Whilst the facts of this case are specific to two grant-making charities, the principles have a broader relevance to all registered and exempt charities, including colleges and universities.

Executive summary

Over the last eight years, almost 100 UK universities have committed to divesting from investments in fossil fuels as part of their responsible investment policy. Alongside other charities, universities have considered carefully the right approach for their institution to take on investment.

On 29 April 2022, the High Court handed down its judgment in the case of Sarah Butler-Sloss and Ors v The Charity Commission and Attorney General. This is the first time for over 30 years that the courts have considered how charity trustees (including the governing bodies of universities and colleges) can legitimately take account of non-financial considerations when investing. This case therefore provides clarification and reassurance for institutions looking to adopt a responsible (sometimes referred to as ethical) approach to investment.

The judgment confirms that there is no absolute prohibition against an institution making investments that directly conflict with its purposes. But, where a governing body reasonably believes that an investment conflicts with its institution’s purposes, it has a discretion as to whether to exclude it – and should exercise that discretion by balancing all relevant factors.

For universities that are reviewing or revising their investment policies, the judgment provides a helpful summary of the law in relation to the exercise of their governing body’s powers of investment alongside clarifying the breadth of discretion that governing bodies may have to take decisions in this area.


The case was brought by the trustees of two charitable trusts (the Claimants), the Ashden Trust and the Mark Leonard Trust. Both charities have general charitable purposes although their trustees have decided to focus primarily on environmental and associated charitable purposes.

The Claimants wished to adopt investment policies which would, as far as possible, exclude investments that did not align with the Paris Climate Agreement 2016 (referred to as the Proposed Investment Policy). The case is topical, given that many charities are considering their approach to responsible investment, particularly in the context of climate change.

The Proposed Investment Policy would exclude over half of publicly traded companies and commercially available investment funds. Although it targeted an annual return of CPI +4 per cent (in line with the published rates of return of other large charities), the Claimants accepted they were unable accurately to determine the extent of the financial detriment which may be suffered by the charities as a result of adopting the Proposed Investment Policy.

The Claimants sought the approval of the Court as to whether the adoption of the Proposed Investment Policy was a lawful exercise of their powers of investment.

Existing law on responsible investment for charities

Prior to the judgment, the only major case in this area was Harries v Church Commissioners for England [1992] 1 WLR 1241, commonly referred to as the Bishop of Oxford case.

In this case it was held that the starting point for charity trustees should be to seek to maximise financial return. The judgment identified three exceptions (which the Vice Chancellor considered would be comparatively rare):

  • Where an investment directly conflicts with an institution’s purposes (such as cancer research charities investing in tobacco shares).

  • Where an investment indirectly conflicts with an institution’s purposes (where particular investments might alienate supporters or donors or make beneficiaries less willing to accept help because of the source of the institution’s money) and where this is the case, the governing body must “balance the difficulties they would encounter or likely financial loss they would sustain if they were to hold the investments against the risk of financial detriment if those investments were excluded from their portfolio”; or

  • Where to do so would not involve a “risk of significant financial detriment”.

The Bishop of Oxford judgment made clear that, the greater the risk of financial detriment, the clearer the charity trustees needed to be of the advantages to the institution of the course of action they were adopting. Governing bodies “must not use property held by them for investment purposes as a means for making moral statements at the expense of [their institution]”.

The Charity Commission’s current guidance (set out in CC14, Charities and investment matters: a guide for trustees and its associated “Legal Underpinning”) are based on the Bishop of Oxford judgment, although there has been disagreement over whether it accurately represents the first and second categories above.

The judgment

As well as a declaration as to whether the adoption of the Proposed Investment Policy was a lawful exercise of their powers, the Claimants asked whether there was an absolute prohibition against making investments that directly conflict with their charities’ purposes.

The judge (Mr Justice Green) determined that the Bishop of Oxford judgment had not intended such a prohibition. This would have imposed a duty not to invest in a particular way which would be difficult to comply with in all but relatively simple cases.

Mr Justice Green helpfully summarised what he considered the law in relation to governing bodies considering non-financial aspects when exercising their powers of investment:

  • Where particular investments are prohibited from being made under the trust deed or governing instrument, they cannot be made.

  • Where there is no such prohibition but the governing body is of the reasonable view that particular investments potentially conflict with its institution’s purposes, “the [governing body has] a discretion as to whether to exclude such investments and they should exercise that discretion by reasonably balancing all relevant factors including, in particular, the likelihood and seriousness of the potential conflict and the likelihood and seriousness of any potential financial effect from the exclusion of such investments”.

  • In considering the financial effect of making or excluding particular investments, “the [governing body] can take into account the risk of losing support from donors and damage to the reputation of the [institution] generally and in particular among its beneficiaries”.

  • However, “[governing bodies] need to be careful in relation to making decisions as to investments on purely moral grounds, recognising that among the [institution’s] supporters and beneficiaries there may be differing legitimate moral views on certain issues”.

  • “Essentially, [governing bodies] are required to act honestly, reasonably (with all due care and skill) and responsibly in formulating an appropriate investment policy for the [institution] that is in the best interests of the [institution] and its purposes. Where there are difficult decisions to be made involving potential conflicts or reputational damage, the [governing bodies] need to exercise good judgment by balancing all relevant factors in particular the extent of the potential conflict against the risk of financial detriment.”

  • “If that balancing exercise is properly done and a reasonable and proportionate investment policy is thereby adopted, the [governing bodies] have complied with their legal duties in such respect and cannot be criticised, even if the court or other [governing bodies] might have come to a different conclusion.”

The judge went on to endorse the approach of the Claimants, finding that they had exercised their powers of investment properly and lawfully. They would be permitted to adopt the Proposed Investment Policy and in doing so would discharge their duties in respect of the proper exercise of their powers of investment.

Wider implications for charitable colleges and universities

While High Court decisions are not binding on other High Court judges, they are persuasive. Strictly speaking, therefore, the judgment only applies to the Claimants, but the case is clearly of wider significance.

The judgment does not represent a radical change, but it does provide helpful clarification on how governing bodies should approach non-financial factors and the process the law expects them to follow when making decisions about responsible investment.

Where it offers less clarity is on the level of diligence expected of governing bodies in assessing the likely financial detriment involved in a particular investment.

It remains to be seen whether the Charity Commission will tackle this in its revised guidance or whether, as was the case in the Commission’s 2021 consultation, it leaves this for institutions to work through themselves using the Commission’s guidance on decision making.

Next steps

The draft guidance that emerged from the 2021 consultation has remained to be finalised pending the judgment. The Charity Commission has now confirmed that it will be publishing updated guidance in due course to ensure governing bodies “can confidently adopt appropriate policies including in the context of pressing concerns around climate change”.

If you require further information about anything covered in this briefing, please contact James Maloney, Emma James or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, August 2022

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About the authors

James Maloney charity lawyer

James Maloney


James advises a broad spectrum of charities, and those who fund, work with and regulate them, on the full range of charity law issues. He has a particular focus on advising philanthropists on the legal aspects of structuring their giving and sits on the STEP Philanthropy Advisors Global SIG Steering Committee.

James advises a broad spectrum of charities, and those who fund, work with and regulate them, on the full range of charity law issues. He has a particular focus on advising philanthropists on the legal aspects of structuring their giving and sits on the STEP Philanthropy Advisors Global SIG Steering Committee.

Email James +44 (0)20 3375 7114
Emma James lawyer photo

Emma James


Emma’s practice is comprised of advising charities and other not-for-profits on the legal issues they face both on a day-to-day basis and in a strategic context.

Emma’s practice is comprised of advising charities and other not-for-profits on the legal issues they face both on a day-to-day basis and in a strategic context.

Email Emma +44 (0)20 3375 7469

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