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02 April 2020
Impact investing, ethical investing and climate change concerns are increasingly discussed when considering investments and are now affecting trustee decision making.
Requests by beneficiaries that factors such as climate change be taken into consideration, or that certain industries be excluded because of their environmental impact, when investing a trust's assets can bring challenges for trustees.
While it is relatively straightforward to include investment parameters when establishing a trust, the issues are more difficult when the trust is already established and trustees have full investment powers.
Trustees have a duty to act prudently, with appropriate skill and care and in the interests of beneficiaries when considering investments. They need to ensure that they are not influenced by their own moral considerations – but how should they deal with those of their beneficiaries?
Trustees can sometimes take into account beneficiaries' moral wellbeing when considering whether a distribution is for the benefit of that beneficiary. Therefore, could a similar analysis be applied to investments? Could it be argued that a loss of investment return can be offset by an increase in social wealth? This seems difficult, but could it be an area for challenge in the future? Consideration must also be given to how beneficiaries' wishes might change. For example, concern over the impact of investments on climate change may alter with developments in technology. The considerations are also highly subjective factors and it is unlikely that all beneficiaries will have the same view about which investments are acceptable from a moral or social perspective.
Trustees can make ethical investments but the usual considerations would still apply. Such investments may be considered good long-term investments, with some more traditional industries viewed as having a reputational risk or diminishing value as environmental laws change. Depending on the type of investment, it could be viewed as more speculative resulting in only a limited proportion of the trust fund being invested. However, beneficiaries may not be happy with the larger proportion still being invested in a way that they consider to be morally unacceptable.
There are no easy solutions, and trustees' jobs will be further complicated if individual beneficiaries disagree about investment priorities. If a trustee is faced with only a few beneficiaries wishing to make certain types of investment, should they look into splitting the trust? Again, this is difficult for trustees, as it may not be considered as being in the beneficiaries' interests to do so.
This area is likely to become increasingly difficult for trustees as the profile of such issues increases. The law in this area may develop but, at present, trustees must consider investment performance and not just moral considerations.
There may be alternative mechanisms to consider, such as shareholder pressure to change the environmental profile of certain industries. Trustees may need to keep adapting and be prepared to listen to their beneficiaries for both parties to understand the issues that the other is facing.
An earlier version of this article first appeared in Connect Magazine, Jersey.
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