The question of how pension funds, charitable trusts and other investment vehicles balance their financial and other objectives, such as sustainability, is emerging as a key battleground in relation to the climate transition. Two recent cases – while concerning different legal frameworks (one relating to charities, the other pensions) – highlight the difficult balancing act that trustees face when exercising their investment powers. The fact that the Court found in favour of the trustees in both cases also illustrates the scope that trustees have to operate if they exercise their discretions properly. Similar cases have been brought in other jurisdictions, most notably Australia, and we expect these sorts of legal challenges to be an important part of the landscape over the next few years.

Butler-Sloss v Charity Commission 

 The first case was brought by the trustees of two charities, who were implementing a new investment policy designed to ensure alignment with the Paris Agreement (the Proposed Investment Policy). Both charities were established to pursue the statutory charitable purposes of environmental protection or improvement. Together they held £64 million in assets.

The trustees sought declarations from the High Court that they were acting lawfully by implementing the Proposed Investment Policy. The claim was brought against the Charity Commission and the Attorney General, who submitted that it was premature for the Court to approve the Proposed Investment Policy based on the information provided by the trustees, although they invited the Court to clarify the position on this area of law.

The charities’ Proposed Investment Policy

Cazenove Capital Management (Cazenove) managed 85% of the charities’ assets. While the investment policies, agreed in 2015, stated that they supported the development of equitable, sustainable societies, the trustees were concerned that certain of the holdings within their portfolios conflicted with the charities’ statutory purposes.

In conjunction with an independent private investment office, the charities developed the Proposed Investment Policy, which stated that (i) the trusts’ investment portfolios should be designed to limit temperature rises to well below 2 degrees Celsius, and preferably 1.5 degrees Celsius, above pre-industrial levels; and (ii) that the trusts’ investment return objective should be UK consumer price inflation plus 5 per cent. on average over a five-year period.

This was supplemented by additional guidelines, including that an average minimum yearly reduction of 7% in greenhouse gas emissions intensity was to be achieved until 2050 and that Scope 3 emissions (emissions not resulting from assets owned by a company but by those that it is indirectly responsible for up and down its value chain) analysis should be factored in over the next four years. In turn, those guidelines would be implemented by an exclusionary investment policy. This included excluding all investments in tobacco, weapons and fossil fuel extraction, for example, plus any company which did not rank in the first or second quartiles of ESG ratings, unless investment managers could present a strong case for investment on sustainability grounds.

Conflicts with charitable purposes

The Judge considered two substantive issues. First, he considered how to approach the issue of an investment decision potentially conflicting with a charity’s statutory purpose. Second, he turned to the “real area of dispute”: how to balance a charity’s objective of maximising returns with any such conflicts with charitable purposes.

The so-called Bishop of Oxford case (Harries v The Church Commissioners for England [1992] 1 WLR 1241) is the only reported case dealing with ethical investments made by charities. It established that maximising financial returns is the “starting point” for a charity trustee’s investment decision-making process, because it gives charities the means to further their charitable purpose, subject to three exceptions. The first exception is where there is a “direct conflict” between an investment decision and a charity’s statutory purpose, such as where a Quaker charitable foundation proposes investment in an arms factory. The Judge ruled that where such a conflict exists it is a discretionary matter for the charity’s trustees to determine the correct course of action and that an absolute prohibition on making such investments does not exist.

Balancing financial returns with charitable purpose

Second, the Judge considered the balancing act a trustee is required to make between maximising financial returns and pursuing non-financial objectives. On this point, it was argued that the trustees had not sufficiently considered the potential financial detriment of implementing the Proposed Investment Policy, or if they had considered it the trustees had not documented this exercise adequately.

The Judge was satisfied that the trustees had considered this balancing exercise properly. He relied on the fact that the trustees had explicitly included an investment return objective in the Proposed Investment Policy and proposed to regularly assess their portfolios against recognised benchmarks. He also noted that they acknowledged there was a “risk of short term financial detriment” in the adopting the Proposed Investment Policy. He continued:

It seems to me that the Claimants have very much in mind the potential financial effect of the Proposed Investment Policy. They cannot be more precise as to the figures because things change rapidly and furthermore there remains uncertainty about the effect of further Scope 3 emissions data affecting the investable universe. Mr Jaffey QC submitted that there is no evidence of the Claimants considering alternative strategies such as engaging with companies as a shareholder to bring about change from within rather than divesting completely. But I think this criticism is unfounded. The Claimants have decided, reasonably in my view, that there needs to be a dramatic shift in investment policies in order to have any appreciable effect on greenhouse gas emissions and for there to be any chance of ensuring that there is no more than a 1.5°C rise in pre-industrial temperature. The only question is whether they have sufficiently balanced that objective with any financial detriment that may be suffered as a result. In my view they have and the performance of the portfolio will be tested regularly against recognised benchmarks and will seek to provide the financial return specified in the Proposed Investment Policy."

Consequently, the Judge made a declaration that the trustees were permitted to adopt the Proposed Investment Policy and that they were properly discharging their duties.

He declined to make a number of additional and more granular declarations in relation to using particular materials to determine investment policy, or on the role of morality in a charity trustee’s decision making.

McGaughey v Universities Superannuation Scheme Limited 

The second case was brought by two members of one of the UK’s largest pension schemes with £82 billion of assets under management, the Universities Superannuation Scheme (the Scheme), who applied to bring four ‘multiple derivative’ claims against the Scheme’s corporate trustee (USSL) about a variety of matters. The fourth claim was that the directors of USSL had breached their directors’ duties by allowing the Scheme’s continued investment in fossil fuels, and that the Scheme had suffered and would continue to suffer financial loss as a result.

The Judge refused the application to bring all four claims. He distinguished between various kinds of derivatives claims. This was not a normal derivative claim, brought by a company’s shareholders on behalf of the company, but was a ‘multiple derivative’ claim (brought not by shareholders of USSL but by members of the Scheme managed by USSL). This meant that the claim was governed by common law rules, rather than under the Companies Act 2006, and as a consequence, the court would only grant permission for the claim to be continued if the claimants met the following requirements:

  • They have sufficient interest or standing to pursue the claims on a derivative basis on behalf of the company or other entity;
  • They establish a prima facie case that each individual claims falls within one of the established exceptions to the rule in Foss v Harbottle – in this case, that the defendants had committed a deliberate or dishonest breach of duty or had improperly benefitted themselves at the expense of USSL;
  • They establish a prima facie case on the merits in respect of the claim; and
  • It is appropriate in all the circumstances to permit them to pursue the claim.

In relation to the fourth claim, the claimants alleged that the directors of USSL (also all named as defendants) were in breach of their directors’ duties to promote the success of the Company taking into account its long-term interests by allowing the Scheme to continue to invest in fossil fuels and that although they had announced that the Scheme would be carbon neutral by 2050, they had not put in place an adequate plan for dealing with the risks of their continued investments, or for divestment. They also argued in the alternative that the directors were in breach of their duties by failing to consider the Paris Agreement, an ethical investment survey and calls from the University and College Union and individual universities to divest from fossil fuel investments. To demonstrate that the Scheme had suffered financial loss and that it would continue to do so, the claimants relied on two articles from the Financial Times and a study published by Imperial College London which found that fossil fuel companies have performed badly since 2017 and that renewable energy portfolios have performed better since 2010. No further particulars of the loss were given.

In response, USSL explained how it had considered the sustainability of its investments over the years, including by publishing a discussion paper on the topic, by seeking legal advice, by its membership of the Institutional Investor Group on Climate Change, and by its publication of two voluntary TCFD reports. It also has a responsible investment strategy and produces responsible investment (or Stewardship Code) reports on a regular basis. Importantly, USSL explained that it did not consider divestment to be an appropriate way to achieve its net zero strategy, and that it prefers to engage with the assets and markets in which it invests.

The Judge concluded that the claimants had not established a prima facie case that USSL had suffered any loss as a consequence of the directors’ failure to adopt a plan for divestment. Even if they had established that USSL had suffered loss, there was no suggestion that the loss was reflective of the financial losses which they themselves had suffered. On that basis, the claimants failed to meet two requirements of the test: they did not have sufficient standing or interest to continue the claim, and had not established a prime facie case either.

The Judge went further, and considered whether, leaving aside the issues of standing and loss, the claimants had established that the directors of USSL had committed a deliberate or dishonest breach of duty, and again found against the claimants. USSL had explained its approach to the sustainability of its investments, and while the claimants might disagree with USSL’s approach, it was well within its discretion in exercising its powers of investment.


In many ways the two cases are very different, not least because McGaughey essentially concerned divestment as an integral part of an investment policy designed to achieve the financial goals of the pension fund, and within a pensions law framework, whereas in Butler-Sloss the goal was to align the charities’ financial activities with the charitable purposes of the trusts within a charity law framework. 

However, both cases involved trustees having to make complex judgements about the interplay between aspired sustainability outcomes and the financial investment goals of the relevant trust. Institutional investors increasingly find themselves having to make judgements of this sort and may be nervous in doing so, especially if they are not able to base decisions on established models and numerical measures. The approach of the court in each case when assessing whether the trustees had complied with their duties is therefore instructive and reassuring: in each case it focused on the robustness of the process that the trustees had gone through in reaching their decision more than scrutinising the final decision, and in the case of Butler-Sloss did not insist on quantification of the financial impact of the proposed policy.

For further discussion about the legal framework applying to asset owners, including pensions, and asset managers in 11 key jurisdictions, as regards investment for sustainability impact, take a look at the Legal Framework For Impact which Freshfields and selected local firms produced for The Generation Foundation, the UN-supported Principles for Responsible Investment and the UN Environment Programme Finance Initiative.