Trustees and sustainable investing

Praxis has a long tradition of working with families and legal advisors to tailor trust provisions to meet their specific needs and concerns including the way that trust funds are invested. In this article our In-House Legal Counsel Mark Biddlecombe takes a look at trusts and sustainable investing.

One of the most important decisions that trustees have to make in carrying out their duties on behalf of the trust's beneficiaries is how to invest trust assets.

Trustees will take a number of factors into account when they make investment decisions and increasingly this will include factors above and beyond traditional financial performance measures. A company's approach to environmental sustainability and governance issues (ESG for short) is a valid consideration for trustees and investment professionals.

For some clients simply taking ESG measures into account is not going far enough. They may have very strong views on investing in companies with a poor environmental record or that are involved in arms alcohol or gambling for example. Restricting investments in these types of companies would have a material impact on the scope of potential investments and long-term investment performance.

The challenge of balancing ethical considerations with their fiduciary duties is one that trustees are having to address with their clients. While it is increasingly possible to argue that sustainable investing may lead to better long-term financial performance they may be asked to put ethical considerations higher up the list of priorities than pure financial returns.

To understand the challenges here and how this balance can be struck it is important to understand the legal framework within which trustees have to operate.

For trusts established under Jersey and Guernsey law the starting point is their statutory obligation to preserve and enhance so far as is reasonable the value of the trust property. In Guernsey there is an additional overriding duty to act 'en bon pre de famille'. In broad terms this duty has parallels in English case law that requires that when a trustee invests it should "take such care as an ordinary prudent man of business would take if he were under a duty to invest for the benefit of other persons for whom he felt morally bound to provide".

Fundamentally the critical concern is to act in the best interests of the beneficiaries. While this is a point of general principle it can only be understood in the specific circumstances of the trust in question and the purpose for which the trust was established in the first place. For some families ESG/ethical considerations are paramount from the outset and a trustee who takes those concerns into account even if it leads to lower financial returns is nonetheless acting in the best interests of the beneficiaries in a broader sense. For such families it makes sense to incorporate their ethical concerns and priorities into the trust documentation. In recognition of the growing trend for sustainable investing GuernseyFinance has recently collaborated with law firm Ogier to produce a guide for developing sustainable trust deeds for private wealth and family offices.

Looking forward sustainable or ESG investment approaches are increasingly important guides to long-term returns. With increasing government and consumer pressure around the world for companies to reduce their carbon footprint and to ensure that their manufacturing processes do not exploit workers in the emerging economies market forces will reward those that do this best and punish those who do not adapt.

While it is too early to say that the recent outperformance of ESG indexes against their traditional counterparts which include legacy oil stocks and the like is a one-off or a continuing trend it seems that sustainability is now mainstream. In the UK pension trustees must already demonstrate how they have dealt with ESG factors in their investment decisions and legislation is pending that will require pension trustees to have effective policies in place to manage the risks posed by climate change. While this may not be directly relevant to trusts established for families it shows that the UK government is concerned to ensure that pension funds are protected from the negative effects of climate change and mitigate the risks of a global shift towards a zero-carbon economy. All trustees will have to keep those same risks in mind.

It is not just the regulatory environment that is changing. It is becoming widespread industry practice for companies and asset managers to issue policy statements demonstrating their commitment to ESG and there is increasing shareholder activity at general meetings to question boards on their ESG approach. Trustees will want to make sure that their investment advisors are taking this shift into account.

This article constitutes neither professional advice nor a binding offer by us to provide professional services. Any engagement in respect of our professional services is subject to our standard terms and conditions of business and the provision of all necessary due diligence.