Beyond the call of duty

Trustees of incorporated charities have a duty to have regard to the environmental impact of their charities. This should raise two important questions for many trustees: 1) what do trustees have to do to comply with the duty to consider the environmental impact of their charity; and 2) can this duty permit trustees to implement more extensive environmental policies?

The new duty

The Companies Act 2006 s.172 requires a trustee of a charitable company to act in a way that he believes will promote the success of the charity. Success in this context means the achievement of the charitable objects, and the trustee has an almost unfettered discretion to do what he subjectively believes is in the charity's best interests. The proviso is that, when forming his belief, the trustee must pay regard to various factors, including the impact of the charity's operation on the environment.

This could lead to a very procedural process whereby trustees consider each factor before making any decision. The Department for Business, Enterprise and Regulatory Reform has issued explanatory notes which provide some guidance on how it considers the legislation will be interpreted by the courts. In its view, there is no need for a trustee board to consider factors which are not relevant. As long as the trustees act in good faith, there is no liability merely because they failed to consider a factor which would have no impact on their decision. Environmental issues do not therefore need to be considered before every trustee decision.

Where environmental issues are a significant aspect of a decision, it is good practice for any relevant board deliberation to be minuted. There is no additional requirement for the board to make or keep records but trustees may feel more comfortable if minutes of important decisions are kept.

A claim against a trustee for any breach can only be brought by the charity. If the board of trustees did not consider the environmental impact of their chosen course of action, it is likely that only someone subsequently in control of the charity would take legal action. It is difficult to envisage the situation arising where such legal action was in the charity's best interests and arose as a result of the failure to consider environmental impact, as opposed to arising from a failure to exercise reasonable care as a trustee.

Trading subsidiaries

English law has previously taken a very shareholder-centric approach to corporate law. This means that, with a small number of exceptions, it permitted companies to act only in the interests of their shareholders. This contrasts with many other jurisdictions which impose substantial and properly enforceable duties on companies to act in the interests of a wider group of stakeholders, such as employees. Before the Companies Act 2006, a charity was therefore subject to very few company law restraints regarding the manner in which it ran its trading subsidiary.

The duty to have regard to environmental impact, however minimal that duty may be, is a fundamental change in company law. There has been a departure, albeit almost negligible, from the ability of a charity to run a subsidiary company focusing exclusively on profit. Given these changes, charities may wish to review the governance of any incorporated subsidiaries that they own. The directors of such subsidiaries can no longer pursue profits without first considering, among other factors (if relevant), the environmental impact of the pursuit.

Above and beyond

The duty to consider environmental impact, where relevant, is something that many would regard as good practice in any event. Therefore it can be slightly misleading to concentrate on enforceable legal rights. Many trustees already consider the environmental impact of their actions, whether because of personal convictions or because it is in the charity's best interests. Yet they must spend funds exclusively on furthering their charity's objects. For example, a charity, unless it has environmental objects, may struggle to justify spending more to buy an environmentally friendly product instead of an equally effective alternative.

On the other hand, environmental activity can sometimes be justified as being in the best interests of the charity. Where an action may harm the environment, increasingly there is a chance that it would create negative publicity for a charity. Recent Charity Commission research (RS17 '“ 'Going Green: Charities and Environmental Responsibility') talks of environmental 'inaction having a potentially negative impact'. Trustees have to balance the 'cost of environmental measures against other factors such as benefits to their reputation and donor confidence'. It should also be mentioned that some '“ though by no means all '“ positive environmental action can be cost-neutral or can even save money. Where savings are possible, trustees should take action as part of their general duty to safeguard their charity's assets.

If the above justifications do not apply, the new duty may facilitate additional possible justifications for spending funds on environmental activities. To comply with their statutory obligations, trustees must be informed about the possible environmental impacts of their decisions. For example, the cost of an environmental audit may have previously been considered by the trustees to outweigh any possible benefits. But now, an environmental audit of the charity may be justifiable as a compliance cost and thus a legitimate use of charitable funds.

The new duty is restricted in scope and is almost unenforceable. It appears likely that economic factors and reputation management will be more common justifications for environmental action by trustees of charities. However, the new duty encourages trustees to consider the environmental implications of their actions. It may even enable trustees to justify taking limited environmental measures, mainly involving information gathering. While its legal effect may be relatively minimal, the new duty could be more important for changing behaviours and attitudes.