Short-term financial detriment not a barrier to Paris-alignment - High Court

The High Court has confirmed that the trustees of two charitable trusts are permitted to implement a Paris-aligned investment strategy, despite the potential short-term financial detriment, in what has been highlighted as a "significant" judgment for pension schemes.

The two trusts are both part of the Sainsburys Family Charitable Trusts network, with charitable objectives that include environmental protection and improvement and the relief of poverty.

Following concerns that the trusts' investments could conflict with these charitable purposes, the trustees worked with investment advisers and assets managers to develop an investment portfolio that seeks to ensure that the charities' investments are aligned with the goals of the Paris Agreement and thereby avoid direct conflict.

However, both the Charity Commission and the Attorney General challenged the adoption of the proposed investment strategy, raising concerns that they had not adequately balanced the potential financial detriment to the trusts with the conflict to the charitable purposes

The High Court has since dismissed this and approved the proposed investment strategy on the basis that the trustees had followed a proper decision-making process in which they had correctly balanced the trusts' charitable objectives against the potential financial detriment.

Whilst the ruling was given in a charitable trust context, Herbert Smith Freehills pensions partner, Michael Aherne, suggested that the fact that the judge held that the short-term financial detriment of adopting a Paris-aligned investment strategy was not a barrier for the trustees, is "significant".

He explained: “In a pensions context, trustees of defined benefit schemes looking to implement ambitious net zero or TCFD related targets may seek to argue that similar short term financial impacts do not prevent them from adopting investment strategies aligned to such targets provided they are satisfied that the anticipated long term financial returns are acceptable in the context of the scheme's funding and covenant position.

"The judge was satisfied that the proposed investment strategy was justified, as the proposed benchmark (of consumer price index plus 4 per cent) was in line with the published strategies of other large charities.

"On this basis he was prepared to endorse the proposed strategy even though it was accepted by the trustees that there might be some short-term financial detriment and even though the strategy excludes over half of publicly traded companies and many commercially available investment funds.

"This decision adds to the growing case law in this area and it wouldn't be surprising to see a similar case arise in a pensions context in the coming years as trustees, sponsors and members become more focused on the carbon transition and Paris-alignment."

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