31 August 2022

Developments in Fiduciaries Powers in Relation to Ethical Investments - Ashleigh Carr and Maryam Oghanna write for ThoughtLeaders4 Private Client Magazine

Senior Associates, Ashleigh Carr and Maryam Oghanna, have authored an article for Thought Leaders 4 on the topic of developments in fiduciaries powers in relation to ethical investments.

The article was first published in Thought Leaders 4 Private Client Magazine ‘Next Gen Wealth’ in August 2022 and can be read in full below.

To what extent can fiduciaries take non-financial considerations into account when exercising their investment powers?

It seems like everyone is talking about ‘ethical investing’. In this article, ethical investing can be read to mean “an investment made not, or not entirely, for commercial reasons but in the belief that social, environmental, political or moral considerations make it, or also make it, appropriate”, (per Lord Wilson in R (Palestine Solidarity Campaign Ltd & Anor) v Secretary of State for Communities and Local Government [2020] UKSC 16).

This may inhabit different forms, including ‘ESG’ (measuring the ethical impact of an investment using Environmental, Social and Governance indicators), Socially Responsible Investing or ‘SRI’ (which goes one
step further, by screening and avoiding investments based solely on ethical considerations) and Impact Investing (investments which aim to create financial returns and measurable social or environmental impact).

Whilst the concept of ethical investing dates back many hundreds of years, it is increasingly becoming a hot topic for private wealth advisors, many of whom are reporting a growing demand, particularly amongst ‘next gens’.

This influence affects trustees and other fiduciaries who must consider whether and what weight to give non-financial factors when performing their fiduciary duties. Whilst the law regarding trustee duties in relation to investments is well established, the bedrock cases significantly predate the growing trend in ethical investing. New law is arguably required to reflect social, economic and environmental developments as the climate crisis and sustainability continue to climb the global agenda.

In this article we look briefly at case law which touches on the tension between ethical investing and prioritising financial reward, and the legal guidance and commentary which is emerging on the topic.

Case law

The starting point when considering the case law on non-financial considerations is Cowan v Scargill [1985] Ch 270. In that case, Sir Robert Megarry V-C held that the board of trustees of a mineworkers’ pension scheme were in breach of their fiduciary duties by blocking overseas investments and investments which were in competition with coal.

He reasoned that, where the purpose of the trust is to provide financial benefits for the beneficiaries, the trustees should exercise their power of investment to yield the best return (judged in relation to the risks of the investments in question). Trustees must exercise their powers in the best interests of the beneficiaries and put aside their own personal interests and views.

However, it was noted that financial benefit would not always be the trustees’ sole concern: “benefit” has a very wide meaning and it may be reasonable to prioritise benefits other than financial ones, where all the beneficiaries are adults and support an alternative policy. However, “such cases are likely to be very rare”, and where the trusts are for the provision of financial benefit, there would be a heavy burden on anyone who asserted that it was for the benefit of the beneficiaries to receive less.

Whilst the impact of Cowan has been debated, it is unlikely to offer much comfort to trustees and beneficiaries who wish to prioritise benefits other than financial ones. This is demonstrated by the recent case McGaughey v Universities Superannuation Scheme Ltd [2022] EWHC 1233 (Ch) which concerned two members of a pension scheme who were unhappy with the trustees’ continued investment in fossil fuels. Instead of alleging that the trustees had a duty to sell its fossil fuel investments for ethical reasons, the claimants pursued a claim on the basis that the pension scheme’s continued investment in fossil fuels represented a breach of their directors’ duties pursuant to sections 171 and 172 of the Companies Act 2006. Their claim ultimately failed.

The Court noted that the claimants had not run the ethical argument “no doubt because the Court rejected such an argument in Cowan v Scargill [1985]” and suggested that the more appropriate claim would have been a breach of trust claim against the company, despite the practical difficulties that would have arisen with that claim.

The position is slightly different for charitable trusts. Cowan was distinguished in Harries v The Church Commissioners for England [1992] 1 WLR 1241 (“the Bishop of Oxford case”) which was, until recently, the only reported case dealing with ethical investments by charities. Here, the Bishop of Oxford was concerned that, by permitting investments in South Africa, the Church Commissioners of England failed to sufficiently take into account the underlying purpose for which the assets were held.

Sir Donald Nicholls V-C held that where the trustees held investments, the starting point (similarly to Cowan) is that the trust will be best served by the trustees seeking to obtain the maximum financial return. However, the decision goes further than Cowan in that he recognised that there were certain exceptions to the general rule: (i) where the nature of the investments would directly conflict with the charity’s purposes; (ii) where the investment may indirectly conflict with the charity’s purposes (such as through alienating certain donors or beneficiaries); and (iii) where there is little or no risk of significant financial detriment to the charity.

It was unclear whether the Bishop of Oxford case created an “absolute prohibition” on making investments that directly conflicted with the charity’s purposes or objects. The High Court recently considered that question in Butler-Sloss v The Charity Commission for England and Wales [2022] EWHC 974 (Ch), in which the trustees of two charities sought the court’s blessing of the adoption of new investment policies which would align the charities’ investments with the Paris Agreement (which aims to limit global warming). The judge concluded that there was no absolute prohibition on directly conflicting investments (a view which seems to have been shared by Charity Commission, as expressed in its current guidance on charity’s investments, CC14, and all of the parties in the case). Instead, the trustees have to perform a discretionary exercise, balancing the potentially conflicting investments against the risk of financial detriment from implementation of that policy. He further held that the trustees were permitted to adopt the proposed
investment policy and that in doing so would discharge their duties in respect of the proper exercise of their powers of investment.


There are differing views on the impact of Cowan and the scope of trustees’ duties to consider ethical investing. Some of the legal commentary suggests that Cowan is misunderstood and that the nature of trustees’ fiduciary investment duty has always been sufficiently flexible to allow pension schemes to consider ethical investing. Furthermore, guidance in the charity sector provides greater scope for fiduciaries to take a balanced approach to considering investments and what is in the interests of the charity.

Trust law already acknowledges that ‘benefit’ is not limited to financial returns, yet it remains unclear where to draw the line. Cowan still appears to represent a barrier to ethical investing, at least where the only demonstratable benefit is ethical and not financial. The thrust of much of the emerging legal commentary is that this is an unnecessarily restrictive approach, and there is increasing feeling that financial institutions and other organisations should take non-financial risks into account when exercising fiduciary duties.

This may partly be due to the dichotomy between ethical investing and financial reward becoming outdated, as acknowledged by Lord Sales in a recent lecture paper entitled ‘Directors’ duties and climate change: Keeping pace with environmental Challenges’:

“there is much force in the view that directors may and, increasingly, must take into account and accord significant weight to climate change in their decision-making. This is not least because a failure to act sustainably is more and more likely to have adverse financial impacts on companies who are, or are perceived to be, behind the curve on environmental issues”.

As Lord Sales concluded in the context of company law, there appears to be justification for trust law to be modified to enable trustees to accord greater weight to ethical issues than has previously been possible.

Ethical investing is only set to grow in popularity and can be a significant force for change. Market pressures such as changing societal attitudes and reputational risk are bringing ethical investing to the fore at pace. In this brave new world, trustees and beneficiaries alike would benefit from further direction elaborating on, and arguably supporting, a fiduciary’s ability to prioritise ethical investing.

There is an emerging view that judicial re-examination may prove useful, but that the real solution will be legislation. We are already seeing new legislation, policy and guidance being introduced in other areas (for example, by the Companies Act 2006 and Occupational Pension Schemes (Investment) Regulations 2005, the Charities (Projection and Social Investment) Act 2016 and guidance by both the Law Commission and Charity Commission). However, the Trustee Act 2000 fails to deal with non-financial considerations. A statutory update may provide greater clarity and certainty.

In practice, and at least whilst Cowan remains good law, it seems that the identity of the trustees and, possibly more importantly, beneficiaries will have the biggest impact on the uptake of ethical investing in the context of individual trusts. As next gens increasingly populate the beneficial classes of these structures, we could reasonably expect to see an increasing positive trend towards ethical investing. Whilst legal developments are awaited to support ethical investing, there are practical steps which might usefully be taken to support the consideration of non-financial benefit when exercising fiduciary powers, and for mitigating risk.

If settlors want to provide trustees with the freedom or even an incentive to invest ethically, they should adopt a similar stance as the regulatory and legislative approach in England and Wales in the context of company law, namely, to seek to inject ethical considerations into their decision making processes. When settling new structures, settlors should think carefully about the purpose and aims of the fund, and consider utilising charitable trusts, purpose trusts and/or foundations. Where there is a discretionary trust, careful thought should be given to the terms of the trust, which can record the settlor’s expectations as to the extent to which trustees can, or should, take non-financial benefits into consideration.

By taking this approach, settlors can incorporate sustainability and ethical investing into a trustee’s duty, instead of leaving it as an obstacle, whilst we wait for the law to catch up with the shift in approach to investing that many next gens are already demanding.

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