As global attention sharpens on climate change and social justice issues, sustainability and responsible governance are increasingly becoming higher priorities for 'Millennial' and 'Gen Z' Beneficiaries.
Whereas previously beneficiaries and settlors often prioritised
financial returns above all else, the younger generation of
beneficiaries see wealth not just as a means of preserving capital
but as a tool for driving positive, long-term change. They are more
likely to advocate for investments that align with their values,
prompting trustees to reconsider traditional investment approaches
and instead consider investments in companies or funds with strong
sustainable, ethical principles and environmental, social,
governance ("ESG") credentials to better
reflect their evolving priorities.
However, the need to take into account sustainable and ESG
considerations when making investments can often raise concern
amongst trustees. Traditionally, trustees have been obligated to
act in the best financial interests of the beneficiaries and this
has meant preserving capital. However, as beneficiaries are
increasingly pushing for investments that reflect modern morals,
trustees are increasingly challenged to determine whether and how
these preferences may be integrated without breaching their duties
and whether they may, in fact, favour a more ethical investment
over a more profitable one.
Can ESG and sustainable investments be a breach of a trustee's fiduciary duties?
Under the Trusts (Guernsey) Law, 2007 (the
Law), a trustee has a duty to act "en bon
père de famille"1, which means that the
trustees must act as a prudent man of business2 and act
in the best interest of all the beneficiaries. In practice, the
duty to act in the best interest of all the beneficiaries is
usually interpreted to mean in the best financial interests of the
beneficiaries3.
Pursuant to the Law, a trustee shall also, subject to terms of a
trust, "preserve and enhance, so far as is reasonable, the
value of the trust property"4 and, where a trust
has more than one beneficiary the trustees, "shall be
impartial and shall not execute the trust for the advantage of one
at the expense of the other"5.
In Cowan v Scargill, Megarry VC stated: "....In the
case of a power of investment, as in the present case, the power
must be exercised so as to yield the best return for the
beneficiaries, judged in relation to the risks of the investments
in question; and the prospects of the yield of income and capital
appreciation both have to be considered in judging the return from
the investment."
Trustees may be concerned that in placing ethical considerations at
the heart of investment decisions rather than seeking the highest
possible financial return, such decisions may be in breach of their
fiduciary duties, particularly if the sustainable investments
underperform or if other beneficiaries challenge such
decisions.
However, in the case of most Guernsey trusts, the duty to preserve
assets and act impartially is often expressly excluded by the terms
of the trust instrument. Trustees are also typically granted wide
discretionary powers in respect of investments, often having all
the powers of a beneficial owner. This allows them significant
flexibility to manage assets as they see fit, including the ability
to invest in a broad range of assets, including investment in
speculative and wasting assets.
In the case of Sarah Butler-Sloss & Others v Charity
Commission [2022] EWHC 974 two charitable trusts sought to
adopt an investment policy to exclude any investments which did not
accord with the Paris Climate Agreement, notwithstanding that such
strategy may have been detrimental to the financial rate of return.
The England and Wales High Court (the High Court)
ruled that there is no definitive rule which mandatorily requires
that a trustee seeks the best financial return and that trustees
have wide discretion to exclude certain investments on
non-financial grounds. In coming to this decision, the High Court
outlined that: "...trustees are required to act honestly,
reasonably (with all due care and skill) and responsibly in
formulating an appropriate investment policy that is in the best
interest of the charity and its purposes... if that balancing
exercise is properly done and a reasonable and proportionate
investment policy is thereby adopted, the trustees have complied
with their legal duties in such respect and cannot be criticised
even if the court or other trustees might have come to a different
conclusion."
Thus, when making investment decisions which are based on ESG and
sustainable principles, trustees are subject to the same fiduciary
principles which apply to any other decision they may make. The
investments must be evaluated with the same level of care, due
diligence and accountability as all other investment choices. The
courts will not generally interfere with such decisions.
It is not unusual for trustees to take into account the changing
wishes and circumstances of beneficiaries when exercising their
powers and therefore it is difficult to see why the exercise of a
trustee's investment powers to invest in ethical and
sustainable investments should be any different. In the matter
of the May Trust [2021] (1) JLR 66, the Royal Court of Jersey
held that when making distributions for the benefit of a
beneficiary, the moral obligations and views of the beneficiaries
should be taken into account. It is considered that the same
principles would apply when a trustee is making investment
decisions, as such powers are also to be exercised in the interests
of the beneficiaries.
Changing landscape
ESG considerations are no longer confined to moral or ethical
viewpoints -they have become essential financial risk and
opportunity factors. Increasingly, the long-term success and
sustainability of investments are tied to a company's or
asset's ESG profile. For instance, poor environmental practices
may expose a business to regulatory penalties, environmental
disasters, or reputational harm. Weak governance structures can
lead to mismanagement or corruption, while poor social practices
can result in consumer backlash or workforce instability. These
factors can directly impact profitability, valuation and investment
performance over time.
Because of this shift, trustees who ignore ESG factors may
inadvertently expose trust assets to hidden or growing risks. For
example, investing in industries reliant on fossil fuels or with
poor labour practices may lead to stranded assets or declining
market relevance. Conversely, companies with strong ESG credentials
are often better positioned to demonstrate resilience, innovation,
and long-term growth.
It seems therefore that ESG may increasingly become a critical,
rather than an optional, component of fiduciary responsibility in
ensuring the preservation and enhancement of trust value for
current and future beneficiaries.
How can trustees mitigate risks?
- Trustees should carefully check terms of the trust instrument
to ascertain what investment powers they have and what (if any)
statutory duties have been expressly excluded by the terms of the
trust instrument for example the duty to preserve and enhance trust
assets and the duty to act impartially between beneficiaries.
- Trustees should obtain financial and investment advice from
appropriately qualified experts so that they can make an informed
decision prior to making any investments.
- Trustees should rigorously document all decisions in respect to
any investments.
- Trustees should consider diversifying assets by investing in
well-performing businesses that have positive financial returns as
well as companies with strong values and keep such investments
under regular review.
- Trustees should consider obtaining an indemnity from the beneficiary/ies requesting such investments to cover the trustee in the event of any losses made as a result of such investments.
Footnotes
1 Section 22(1) of the Law;
2 Spread Trustee Company Limited v Hutcheson [2012] 2 AC 194;
3 Cowan v Scargill [1985] Ch 270;
4 Section 22(b) of the Law;
5 Section 29 of the Law;
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.
