Current approaches to finance and investment have created market failures that at first appear truly overwhelming – climate breakdown and mass species extinction. To quote Greta Thunberg: “Entire ecosystems are collapsing. We are in the beginning of a mass extinction. And all you can talk about is money and fairy tales of eternal economic growth.” In its 2018 Sustainability Report, Schroders wrote that “for most of the last few decades, large companies have grown, even thrived as social and environmental challenges have intensified”. Charities are founded, quite often, to address the results of market failures, but getting directly involved in the market itself can be challenging.
As charities, we are legally required to do positive things and, if there are negative side-effects or consequences, these must be outweighed by our positive work. It’s clear what that means for our operational work. Every year, we report what we’ve done, what impact it has had and how much it has cost in our annual reports. We are not clear what that means for how we invest our capital assets. How we invest has impacts and consequences; we now know that the financial system of which we are a part and the investments we hold are causing or contributing to climate breakdown and mass species extinction in spite of our best efforts to follow the principles of socially responsible investment, which have not proven sufficient to arrest the harms which business creates.
The RSPB and Mark Leonard Trust are two of a group of charities that are seeking legal clarity on our trustees’ investment duties. The Mark Leonard Trust is one of the Sainsbury’s Family trusts and operates under general charitable objectives. The trustees are increasingly concerned about how the trust will be able to fulfil its objectives with growing evidence around the increasing systemic threat of irreversible climate change and biodiversity loss and how it will be able to maintain its endowment in the face of the financial disruption these phenomena will cause. The trustees have looked at the current regulatory guidance on charity investments and found it does not help them navigate these complex issues. The RSPB, which exists to promote the conservation of biodiversity and the natural environment through scientific research, direct delivery, public advocacy and education, is similarly concerned about the systemic threats to the public good it is set up to deliver and the limitations on its choices when making investment decisions.
The climate crisis and the financial system
The Bank of England repeatedly states that climate change poses significant risks to the economy and to the financial system. Sarah Breedon is the executive director of UK Deposit Takers Supervision, which is responsible for the supervision of the UK’s banks, building societies and credit unions. She has oversight of the Bank of England’s work to enhance the financial system’s resilience to climate change. In a speech in April 2019, Breedon stated that the financial risks of climate change are far-reaching in breadth and scope; they will affect all agents in the economy, in all sectors and across all geographies; their impact will likely be correlated and non-linear; and they will occur on a much greater scale than other risks. Breedon also stated that the size of these future risks will be determined by the actions we take and the investments we make today.
Parties to the Paris Agreement – including the UK – have committed to “making finance flows consistent with a pathway towards low greenhouse gas emissions and climateresilient development”. And there is no time to delay: the recent Intergovernmental Panel on Climate Change (IPCC) report found that to limit warming to 1.5°C, the world needs to reach net zero greenhouse gas emissions within 25 years, and that this will require a “major reallocation of the investment portfolio”. Despite this and other compelling evidence that connects our finance system and investment choices to climate change, species loss and escalating financial risk, little is fundamentally changing in how and where most capital is invested. Schroders’ Carbon Dashboard puts society on course for global temperature rise of 4C° – far exceeding the global target of well below 2°C. As a sector, oil and gas company business plans are predicated on a temperature rise of 4.8°C.
Most of our fund managers offer products incorporating environmental, social and governance principles. But do these really deliver what they promise? Schroders reports that £12.9bn has flowed into sustainability funds between 2009 and 2017. At least half of that was into passive funds. It goes on to say that ESG indicators are the results of a series of judgements and analyses that can vary and lead to very different conclusions. That’s why, for example, a company such as Exxon could rate highly according to some current ESG methodologies despite its record on pollution, plans for fossil fuel expansion and track record of lobbying against climate change-related regulation.
But it needn’t be doom and gloom. Although these market failures may feel overwhelming, we do have tremendous agency to deal with them. As a sector, we have much of the knowledge, technology and the wealth needed, but we aren’t yet deploying them fully and appropriately.
Limits of charity investment
The current interpretation of charity investment law does not account for the grave consequences of climate change and biodiversity loss, including the financial risks and the urgency with which investors need to respond to this, or the opportunities associated with changing capital allocation.
Today, if charity trustees consider the risks of climate change and biodiversity loss in their investment policy, it is considered an ethical choice, not a necessity. Their overriding priority remains financial return – and that is taken to be short-term financial return – even if that results in widespread human suffering and long-term financial detriment.
In Charities and Investment Matters, the Charity Commission summarises the law on how charities should approach investment. It explains that charities “may” introduce ethical criteria for the following reasons:
a) a particular investment conflicts with the aims of the charity
b) the charity might lose supporters or beneficiaries if it does not invest ethically
c) there is no significant financial detriment (but over what timescale is not explained).
This approach is based on the principle that trustees should seek maximum return from their investments, with some exceptions as established in the 1991 judgment in the Bishop of Oxford case (Harries v the Church Commissioners for England) – exceptions that the judge considered were likely to be “comparatively rare”. The judgment was very clear that trustees “must not use property held by them for investment purposes as a means of making moral statements at the expense of the charity of which they are trustees”.
Since the Bishop of Oxford case, there have been other legislative and contextual developments that suggest that a similar case today may have a different outcome – or at least be seen in a different light. The Charities Act 2006 removed any presumption that charities provide public benefit and placed an obligation upon the Charity Commission to issue guidance with respect to the public benefit test. It is unclear in law how the trustees of charities like ours, which exist for public benefit, ought to interpret and apply their investment duties differently to investors of other descriptions.
Also, since the Bishop of Oxford case, the evidence on the causes, scale and consequences of climate change and biodiversity loss have become irrefutable. Species abundance is down by 60 per cent since 1970. The World Economic Forum’s Global Risks Report 2019 says that in the human food chain, biodiversity loss is affecting health and socioeconomic development, with implications for wellbeing, productivity, and even regional security. The key drivers of this loss of abundance include agricultural management, climate change, urbanisation, pollution, hydrological change, invasive non-native species, woodland management and fisheries.
All but one nation around the world has agreed that it is imperative to limit climate change to well below 2°C. That requires reallocating capital away from carbonintensive industries and companies. How that is done could result in other benefits to societies across the world. The most recent IPCC report on the effect of climate change found that “near-term action to address climate change adaptation and mitigation, desertification, land degradation and food security can bring social, ecological, economic and development co-benefits. Co-benefits can contribute to poverty eradication and more resilient livelihoods for those who are vulnerable.”
Perhaps, too, the public’s expectations of charities’ investment policies are changing as the public has become more aware of the role of finance in the crisis. In his video address to the 2019 Global Ethical Finance Initiative Conference, the Archbishop of Canterbury, Justin Welby, was emphatic that “money is not ethically neutral”. A 2017 YouGov poll for Good Money Week found 77 per cent of the UK public said they would be unlikely to donate to a charity if its endowments or other assets were invested contrary to its mission.
Is survival really a ‘moral’ question?
Decisions to reduce or remove investments in fossil fuel and other polluting companies and in the approaches to natural resource management that produce the biggest detriment to biodiversity, and instead to increase investments in companies that produce positive social and environmental impacts may seem at first glance to be “moral statements”, in the language of the Bishop of Oxford case. But is this now a subjective moral question at all? The extinction crisis will drive poverty, sickness and regional instability: should charities aligned to the relief of those harms be required to examine the causes and remove such causes from their investment strategies? The crisis is also creating unprecedented financial risks as outlined by the Bank of England. Might it be argued that it is our duty as charity investors to invest in companies that are aligned with limiting global temperature change to well below 2°C?
Let us think about this in terms of the various scenarios associated with climate chaos: 2°C, 3°C and 4°C, our current trajectory.
Human resources consultancy Mercer forecasts an absolute loss of value for investments in coal by 2041 under a 2°C scenario, and an almost complete loss of value in oil and gas by 2050, primarily as a result of policy impacts. But these sectors still show losses under 3°C and 4°C scenarios, albeit much smaller. However, other sectors – not just renewables – show a positive or a comparatively better return over the same period under all scenarios.
In 2012, the World Bank considered that “4°C scenarios are potentially devastating: the inundation of coastal cities; increasing risks for food production potentially leading to higher under- and malnutrition rates; many dry regions becoming dryer, wet regions wetter; unprecedented heatwaves in many regions, especially in the tropics; substantially exacerbated water scarcity in many regions; increased intensity of tropical cyclones; and irreversible loss of biodiversity, including coral reef systems”. Subsequent forecasts suggest possibly greater impacts at less than 4°C. By way of example, the IPCC notes “any increase in global warming is projected to affect human health, with primarily negative consequences”.
What happens to the financial system in such a scenario, assuming there even is a functional financial system? According to the World Bank, the impact of a rise in sea levels alone, with coastal cities underwater or regularly inundated, means “significant damage to property – not only homes and businesses but also public assets and critical infrastructure”.
The conclusion of Mercer’s report is: “Advocating for and creating the investment conditions that support a ‘well-below 2°C scenario’ outcome through investment decisions and engagement activities is most likely to provide the economic and investment environment necessary to pay pensions, endowment grants and insurance claims over the timeframes required by beneficiaries. Financial regulators, particularly for pension funds, are increasingly reinforcing this message by formalising the expectation that investors should consider the materiality of climaterelated risks and manage them accordingly, consistent with their fiduciary duties.”
Perhaps, then, this is simple: trustee boards, regardless of the purpose of the charity, should be advised to ensure that their investment portfolios support a below 2°C scenario not merely as a subjective matter of ethics, and not necessarily as a way to avoid existential risk, but purely in terms of financial return and the avoidance of financial loss.
Let us construct a thought experiment. What if, in 2050, charity investment committees are confronting a world in which we are now fixed on track for a 4°C global rise (we shall set aside separate biodiversity crises). Facing food and water stress, regional instability and the prospect of newly uninhabitable territories, we are experiencing population-scale migration never before seen, new forms of conflict and new global flashpoints: build your own dystopia for a moment. In the event that the financial system remains as it is and your charity continues to rely for stability and possibly income on its investment portfolio, which sectors are now delivering the best financial return? What “ethical” and financial problems does that create for trustees? And what decisions, in 2050, do you wish that the investment committee had taken back in 2020, even at the risk of significant financial detriment in the short term? With that in mind, what advice, what information and what guidance would you expect the Charity Commission to be giving you in 2020?
What needs to happen now?
In a period when our understanding of the scale of the crisis has developed farther and faster than the case law and regulation that govern charity investment, we need a means to build on the historic case law by broadening trustee discretion to account for these systemic and existential risks, clarifying the impacts that investment decisions have on charitable purposes and the obligations that arise as a result of these impacts.
The RSPB and Mark Leonard Trust are working to this end with a range of professional advisers and other charities including the Thirty Percy Foundation and Client Earth: more are welcome. We believe the Charity Commission is ideally placed to initiate such a change, working with us and the Courts and Tribunals Service, and reflecting the enormous growth in public concern about climate and biodiversity – a concern that has already changed many charities’ approach to the funds that they receive, and which will increasingly exert greater pressure on how charities approach their investment activity.
Sian Ferguson is trust executive at the Mark Leonard Trust and Rob George is head of corporate governance and risk at RSPB
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