With ever-increasing awareness and emphasis on environmental, social and governance factors, particularly among the next generation, should trustees be taking a positive ESG stance on their investment policies?
Historically, ESG investment has been thought to compromise performance, and although there are studies purporting to show the opposite, research earlier this year from index provider Scientific Beta suggested ESG investment still has a way to go.
But why should that matter? 'I am a trustee, and I have been given the responsibility for managing the trust fund. I will do it my way', you might say.
Unfortunately it is not that simple.
All trustees, whatever the creator of the trust might direct, have a fiduciary duty.
That is a duty to act at all times in the best interest of all their beneficiaries. And that duty overrides any personal views, values or agenda. So trustees will be judged by an objective standard.
One might argue: 'We as trustees are holding money for current and future generations, shouldn’t we be investing in a way that creates a better world for them? That seems to be more what our beneficiaries care about'.
Leaving aside the need to balance the expectations and needs of future beneficiaries with those of the current beneficiaries, trustees run the risk of challenge from beneficiaries if the investments underperform. And at the moment there is no legal protection against that.
The point has arisen in the context of charities.
The Charity Commission guidance makes clear that charities can follow ESG criteria if – back to the fiduciary duty – it is in the best interests of the charity as a whole.
For example it would clearly be counterproductive to invest in a way that is likely to deter donations.
But it is clear that stewardship of a permanent endowment is not given that latitude, save in extreme examples – an alcohol addiction charity might be excused for avoiding drinks companies.
Charities are more complicated than private family trusts, since one can usually identify with a fair degree of accuracy who the beneficiaries of a family trust are, and if necessary size up the likelihood of them causing you a problem, or indeed their strength of feeling on ESG issues.
But is it really the place of trustees to decide to prioritise the greater good over financial return when investing other people’s money – in effect, deciding for the beneficiaries what is important to them?
And to do that without knowing how important the financial support from the trust for those beneficiaries might turn out to be?
The question becomes: at what point will ESG become so embedded as to be of no impact one way or the other on the price of investments?