Charities may have to re-evaluate their approach to carbon intensive investments

Legal opinion from leading UK legal figure Christopher McCall

A top UK barrister [lawyer] has launched a new legal opinion saying the country’s charities may be legally required to re-evaluate their approach to carbon intensive investments.

It comes as scrutiny grows on fiduciaries’ responsibilities around climate change risk. Just recently, Prince Charles and others launched an initiative that will explore the legal liability risk of pension funds that fail to consider the risk of climate change.

Christopher McCall QC, who is highly regarded as an expert on charity law, trust law and fiduciary duty in the UK, has written a new legal opinion where he suggests that investment in carbon intensive investments may in many cases be “irreconcilable” with the intent behind charities with a wide range of different missions, such as missions relating to the environment, poverty and health.

According to McCall, where a clear conflict exists, trustees of charities must divest from carbon intensive investments, “regardless of the financial consequences”.

This conclusion in based on the principle recognised in a leading case on investment by charities – the 1991 ‘Bishop of Oxford case’ – that charities should not make investments which conflict with their objects.

The case involved a challenge by the Bishop of Oxford to the extent to which the Church Commissioners, one of the UK’s biggest charity investors, should divest from companies with interests in apartheid-era South Africa. The case led to a clarification by the Charity Commission, the sector’s regulator, on ethical investment for charities.

In light of McCall’s new opinion, Luke Fletcher, a partner at charity law firm Bates Wells Braithwaite, says it will ask the Charity Commission to revise its guidance to say that charities must divest from fossil fuels where this conflicts with their mission exists.The Charity Commission guidance advises that charities should not make investments which conflict with their mission – though it doesn’t contemplate the possibility that investment in fossil fuels might conflict with this, or what should happen where this conflict exists.

Fletcher said: “Charity investors are different to other investors. Instead of existing to further their own interests, charities exist to benefit the public, which is relevant to how charities invest. This opinion breaks new ground. Charity boards will now need to ask whether fossil fuel investments represent a risk to mission – given the prospect of dangerous increases in global temperatures.”

Bates Wells Braithwaite recently helped move the UK government to legislate on creating a statutory power of social investment for charities, which enables charities to invest for lower financial return or higher risk where this advances the purpose of the charity.

In his legal opinion, McCall also highlights the financial risks associated with investment in what might be ‘stranded assets’. He argues that all fiduciaries “must be ready to consider, with the benefit of advice, the extent to which the risks associated with carbon intensive assets may currently be underappreciated and not fully priced into the market.”

It’s likely his opinion will be regarded closely by trustees, fiduciaries, charity law firms and charity investors. Kate Rogers, Head of Policy at investment firm Schroders and Chair of the Charity Investors Group, said: “We are seeing a trend of charities and others asking for advice on how to avoid carbon intensive investments – this opinion looks likely to lead to further demand for this kind of advice from charity investors.”