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Estate & Succession Planning 2 December 2022

ESG Investing and trusts

There is no denying that ESG investing is a global trend. It is widely accepted that trustees are increasingly being asked to consider ESG-centric investments by the next generation of beneficiaries, while Forbes recently reported that flows into ESG funds doubled from 2020 to 2021.

Anecdotal stories shared in the fiduciary industry suggest that the NextGen is particularly interested in ESG investing.  This aligns with a recent report by Saltus Wealth Index which found that more than 80% of 25-34 year olds believe that responsible investments make a tangible difference to the environment or society in general, compared to less than 40% of 55-64 year olds.

Whereas investing in ESG strategies, in their various guises, historically meant being willing to sacrifice financial returns in order to “do good”, the investment backdrop and investor appetite has evolved, with ESG strategies now delivering competitive returns versus their unconstrained peers. Even with the recent short-term relative downturn in ESG strategies’ performance, the weight of regulation on businesses and the impact of government policies around the world should continue to favour ESG-style investing.

With this in mind, most requests from trust beneficiaries for trustees to consider ESG investments should be relatively simple to accommodate. It is however worth considering that, as with anything, some requests will deviate from the norm.  A good example of this is the recent Butler-Sloss case, which relates to two charitable trusts and the trustees’ ambition to align the trusts’ investments with the Paris Climate Agreement. It was submitted that by doing this the trustees would be excluding over half of the publicly traded companies and many other commercially available investments.

While the trustees’ proposed investment policy retained a targeted rate of return of CPI + 4%, the trustees approached the court for its blessing to adopt the investment policy, acknowledging that this may be below their usual targeted rate of return.   

If a trustee of a non-charitable trust was to face a similar request from its beneficiaries, what would such a trustee need to consider?

There are several considerations for a trustee –

  • A Trustee’s duties and powers

A trustee has a fiduciary duty to act in the best interest of the beneficiaries, and, under Jersey law, to enhance and preserve the value of the trust assets as far as possible, subject to the terms of the trust. A trustee might take the view that considering non-financial requests is in the beneficiaries’ best interest, but a trustee must generally invest for the maximum financial return, having regard to the trust’s risk profile.

  • Trust Deed

When a new trust is being set up, it is easy enough to draft powers and duties into the deed to authorise and / or oblige the trustee to take ESG into account when making investment decisions, and to possibly include an anti-bartlett clause and indemnities.

However, with an existing trust, it may not be that simple, especially depending on its proper law and when the deed was drafted. Although a trust deed would generally give wide powers of investment, the trustee should consider the overall objective or purpose of the trust, whether they have the power to make investments on considerations other than financial return, and whether variations of the trust deed are allowed. It may well be necessary in some circumstances to consider a variation of the trust deed to include an express power to make ESG investments, clearly defining what would qualify as an ESG investment, and setting any limitations on such investments. This may, however, be a tricky process.

  • Beneficiaries’ wishes

A trustee should certainly consider beneficiaries’ needs and their cultural and ethical beliefs, however, it should not merely accommodate beneficiaries’ requests when making investment decisions, especially if it could have an adverse effect on investment performance. Even with a balanced ESG investment strategy, beneficiaries may become disgruntled with inferior returns over time and seek an explanation as to how it was in their best interest to invest in a lower-performing fund.

A trustee should also consider whether all the beneficiaries are in agreement. With the differing views between older and the next generations, this cannot be taken for granted. Trustees should remember that they are answerable not only to current adult beneficiaries, but also to minors and unborn beneficiaries.

  • Investment policy

The investment policy may very well need to be amended if a trustee decides to make ESG-centric investments, especially if the policy pursues best return only.

  • ESG experts

As with any investment, it is important to select investment advisors and managers specialising in ESG. Not only is this important from a returns and liability perspective, but to truly meet the needs of the beneficiaries, a trustee will need to be sure that the ESG investment is indeed what it purports to be.

Recent research has found that “…on average, ESG funds pick firms with worse employee treatment and environmental practices than non-ESG funds. Despite this track record, we find that ESG funds charge higher management fees and obtain lower stock returns relative to non-ESG funds run by the same asset managers in the same years." Although this research was limited to the US where, it is suggested, greenwashing is stronger than the rest of the world, it illustrates the need for expert investment managers.

  • Impaired investment performance

A trustee will need to consider whether the ESG-directed changes are likely to affect investment performance, and if so, to what extent. As shown in the Butler-Sloss case, the trustee would need to balance the ESG objective with any financial detriment that may be suffered.

  • Consent and indemnity

In the Cowan and Scargill case, the court suggested that a trustee may need to obtain the beneficiaries’ consent to take into consideration the non-financial benefits that the beneficiaries may wish to obtain. Where consent is obtained, it would be usual for a trustee to also seek indemnity from those giving their consent.

  • Court approval

If the investment policy adjustment is far-reaching, as was the case in Butler-Sloss, the trustee may wish to take legal advice on whether the court should be approached for its blessing.

In the Butler-Sloss case, the court decided that the trustees were permitted to adopt the proposed investment policy and that doing so would discharge their duties in respect of the proper exercise of their powers of investments. Although the case pertains to charitable trusts, many of the principles discussed are relevant to non-charitable trusts.

As always, communication with the family is key. Having an open dialogue, making sure all the beneficiaries are heard and that a true understanding is reached on what the beneficiaries’ wishes and expectations are, will go a long way to facilitate the changes that a trustee may need to make. The tides are changing, and trustees need to change with it.

Sanmari Crous, Business Development Manager

A version of this article was first published in the ThoughtLeaders4 Private Client Magazine Issue 9, November 2022: