How does the ESG agenda align with charitable donations and trusts?
In the UK, individuals and charities gave more than £250 million to environmental causes in 2020 (double the rate in 2016).
In 2021, the Government published its 10-point plan to bring the UK to net zero carbon emissions by 2050. Pledges have been made towards restoring the environment and purifying our industrial mechanisms. For big business and individuals alike, one thing is for certain; we must all do our part to reach this commitment.
Charitable legacies and donations
We have all taken ‘green’ steps, such as driving an electric car, considering cycle to work schemes, working in paperless offices, and committing to reduce waste. Many are now looking to have a hands-on approach to achieving their own ‘green’ and ‘sustainable’ agendas through legacies once they pass away.
Legacy Foresight Today have predicted the average annual value of charity legacies in wills will increase by 25%, up to £4.2 billion between 2022- 2026. Many charities are dependent on will legacies, and these posthumous donations allow individuals to make a significant impact, beyond their affordability during lifetime.
In terms of individual tax efficiency, not only are charitable legacies exempt from inheritance tax, but clients should also be advised on the benefit of charitable relief; that is, where 10% of the net estate is left to charitable legacies, the remaining taxable estate has the benefit of a reduced rate of inheritance tax at 36%.
As with all inheritance tax planning, the importance of bespoke advice cannot be understanded. The drafting of these charitable legacy clauses is paramount to maximise efficiency for both the charitable and non-charitable beneficiaries.
Charitable objects- environmental purposes and sustainability
There appears to be positive news regarding environmental donations. In the UK, individuals and charities gave more than £250 million to environmental causes in 2020 (double the rate in 2016).
For the majority, donations to established charities will be the most efficient course of action. However, there has also been an increase in the number of grant-making charitable trusts. It seems individuals are keener than ever to take direct action in tackling charitable concerns. While the settlors of many trusts have sought to focus on environmental factors, other have sought to take a more widespread approach, focusing on ‘sustainability’.
Under the Charities Act 2011 (soon be superseded by the Charities Act 2022), there are 13 defined charitable purposes. This includes the advancement of environmental protection or improvement. These charities tend to focus on the conservation of flora, fauna, geographical areas and specific species. They extend to zoos, sustainable development and biodiversity, recycling and waste management and research into renewable energy sources. The registration and drafting of these charitable objects requires additional care to ensure certainty, and to demonstrate a genuine charitable need.
‘Sustainability’, is not listed as a charitable purpose under the Charities Act 2011. The Charity Commission previously considered the Brundtland Commission in their 1987 report, which defines sustainable development as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” It was decided, ‘sustainability’ alone would not constitute purely charitable objectives. Instead, charities should avoid non-charitable objectives, by limiting the scope to charitable activities. For example, the Charity Commission considered the following to be a means of promoting the concept of ‘sustainability’, by using recognised charitable purposes:
Promoting sustainable development for the benefit of the public by:
- the preservation, conservation and the protection of the environment and the prudent use of natural resources;
- the relief of poverty and the improvement of the conditions of life in socially and economically disadvantaged communities;
- the promotion of sustainable means of achieving economic growth and regeneration.
To mitigate the risk of the Charity Commission rejecting an application due to uncertainty, those drafting charitable objects around sustainability should be particularly mindful of the questions ‘what?’, ‘who?’, ‘where?’, ‘how?’.
Trustee investments and moral duty
Charity trustees have long been advised, they must ‘come to the table with clean hands’, and it seems this notion of ‘clean’ has further extended to investment decisions. Under the Trustee Act 2000, trustees have a duty to act in the best interest of the charity, which includes maximising the return on investments. Trustees have often been mindful of steering away from investments in tobacco and fossil fuels. However, we have seen a steep rise in trustees looking for portfolios with strong ‘green’ and ‘sustainable’ credentials. Historically, investments in fossil fuels have provided the highest rate of return, and this has placed trustees in a place of moral conflict.
Until recently, the leading authority on this matter was Harries v Church Commissioners for England (1992 1 WLR 1241). The case provided that trustees should maximise the investment return available, save for in circumstances where the investment specifically conflicts with their charitable objectives, or is prohibited by the trust deed. The ruling left a sense of uncertainty for trustees who were unclear as to the extent of their discretion in these matters.
Fortunately, in May 2022, a long-awaited judgement was released in the case of Butler-Sloss v Charity Commission, 2022 EWHC 974 Ch, the England and Wales High Court (EWHC). Judge Green found that trustees should consider, ‘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.’ Trustees may now consider additional factors, such as the risk of losing donors and their moral obligations when choosing investments. The focus must be a balancing act in which trustees are protected in the event their investment decisions do not yield the maximum gain (provided their decisions are considered, reasonable, and in the best interest of the charity). The Charity Commission has welcomed the decision.
Fund managers have been ‘switched on’ to the green agenda for a number of years, and many now offer products targeted at this market. Trustees should be careful to take appropriate advice on investments and continue to monitor performance against the whole of market. Accurate records should be made of the decision-making process and of any other factors taken into account when choosing an investment profile.