Millennials have a more sustainable mindset than previous generations. They are twice as likely to invest in companies targeting social or environmental goals. Ethical issues are a fundamental concern for investors in this day and age and it is important for trustees to consider these values in their decision-making if they want to commit to their corporate responsibilities and appeal to clients.
The Trusts (Jersey) Law 1984 (the "Law") sets out trustees' duties in respect of trust funds, namely, to preserve and enhance trust assets. Moreover, pursuant to common law, trustees must conduct their affairs 'as an ordinary prudent man of business would'. This demonstrates how important the financial profitability of any investments is for trustee and, therefore, trustees may wonder how they can combine their duties with ethical and moral concerns?
Ethical and moral considerations
Ethical and moral considerations include objectives such as promoting human rights, pursuing animal protection or investing in climate action. Negative screening (the practice of excluding businesses that are involved in perceived unethical trading such as the sale of tobacco) may also be a central focus for certain investors.
Most trust companies in Jersey have now adopted environmental, social and corporate governance (ESG) strategies to demonstrate their pledge to a more sustainable world. In 2021, Jersey Finance published its long-term strategy and vision for 2030, which states the need for the finance sector to 'support economic growth while reducing pressures on the environment and taking into account social and governance aspects', giving trustees in Jersey more impetus to improve their ethical and moral investment policies.
Main issue
The main issue for trustees, whilst attempting to balance their ethical and moral commitments with their fiduciary duties, is to make sure that investments are made in accordance with the different rules governing trusts: the Law, the trust instrument, any letter of wishes, any reserved powers and any requests made by the settlor and/or the beneficiaries.
As stated above, the Law requires trustees to augment the trust's assets. However, it may be that a settlor's letter of wishes includes a request for ethical investments to be made, and such investments may not be the most lucrative. In such case, should the trustee choose to favour an ethical investment over a more profitable one?
The current regulation
Older law and regulations seemingly prohibiting ethical investment are being eroded. The English law framework on this subject has quickly evolved these past few years and has demonstrated that ethical investment is often permitted, even where no profit is made. In Harries v Church Commissioners for England [1993] All ER 300, a case involving two charitable trusts, the Court held that 'although trustees normally carry out their duty by maximising financial returns, it is not mandatory'.
In Jersey, regulations and guidance are indicating a similar approach and, accordingly, trustees may properly pay regard to ethical and moral issues when considering where to invest funds (save as prohibited by the trust documentation, the settlor or the beneficiaries).
Suggestions for trustees
In general terms, trustees may ensure that they respect both their fiduciary and ethical responsibilities by diversifying a trusts' portfolio and invest in well performing businesses as well as companies with strong values. When in doubt, trustees can make sure investments are not just morally beneficial but also have positive financial returns.
It may be helpful in certain instances to obtain financial advice with regards to a specific investment and assist the relevant parties in making their decisions. There are many ethical companies with better returns than their competitors who do not adopt ESG strategies.
Trustees may also consider setting up a non-charitable purpose trust with the specific purpose of ethical investments which would enable settlors to have reserved powers on a trustee's investments, and, therefore, reduce the trustee's liability.
Finally, trustees must always be sure to act in accordance with the trust instrument and in the best interests of the beneficiaries. Trustees cannot breach their duties and should not enter into non-profitable ethical and moral investments without specific instructions. It is also possible, and in certain circumstances, necessary, to seek the Court's approval under article 51 of the Law with regards to momentous decisions about an ethical and moral investment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
