The value of an ESG-conscious trustee

2nd February 2022

The acronym ESG (environmental, social and governance) has probably been the corporate buzz-term of choice for the last two years (at least).

Prompted in part by the pandemic and attempts to ‘build back better’, together with the widespread focus on COP26 last year, the concept of ESG has moved increasingly into the mainstream - and with so many organisations clamouring to tout their ‘ESG’ credentials, it is easy to get lost in the ESG noise.

One of the key challenges is that ESG investing brings with it such broad metrics when it comes to evaluating companies. Many organisations can tend to excel in certain elements of the ‘E’, the ‘S’ or the ‘G’ but don’t always tick every box.

This can leave even the most astute private client professional confused about how to compare companies’ ESG credentials as there is not always uniformity in how success or value can be measured.

Fiduciary Responsibilities

At its purest form, the current ESG movement has its foundations in the 6 Principles for Responsible Investment (PRIs) drafted by Kofi Annan for the UN in 2006.

The principles were designed to provide a framework for investors to enable them to align their investment objectives with broader societal needs, and they remain highly relevant and practicable today, including when it comes to fiduciary responsibilities.

There are two main threads to consider when assessing a corporate trustee’s ESG credentials:

1) How does the firm actually behave? What are its values? What are the trustee’s own actions in respect of its environmental impact? It’s impact in the communities within which it operates. How does it treat its staff? What is the diversity of the trustee board makeup? How well is the company governed? What are the ethics it outwardly displays and what standards does it hold itself to and aspire to?

2) How will the trustee invest the trust fund once appointed? What will its investment decision making be guided by? What is the impact that its investments will have? Whose views will the trustee take into account when forming these decisions?

Suntera Global, as a Group, has made a commitment to high ESG standards that sit at the heart of its culture. Suntera is built on a strong foundation of business governance, ethics and responsible practices that prepare it for the future, whilst its corporate ethos is to ‘empower responsible ambition’.

When we act in a trustee capacity, we believe that, in line with that underpinning ethos, it is even more important to talk openly with clients about their aspirations and values as we take stewardship of their family and corporate wealth, to ensure that the services provided to them can be tailored accordingly.

Changing Attitudes

We have talked in previous briefings about the importance of governance and how it needs to be at the heart of modern day trustee’s thinking, but it’s also important to note how the ‘E’ and ‘S’ can overlay with trustee investing.

ESG investing is often talked about in the context of ‘Next Gen’ private wealth, what has become known as ‘The Great Wealth Transfer’ from Baby Boomers to Millennials, and the changing consumer and investor attitudes that accompany this.

This is perhaps doing the prior generations something of a disservice, as impact and ethical investing has been around for many, many years. Nevertheless, ESG investing has snowballed in the last few years, with capital flows into ESG-linked funds more than doubling between 2019 and 2021.

As suggested previously, large events like COP26 have certainly focussed investor minds on the challenges that are faced globally and that more help is needed to effect change.

“A society grows great when old men plant trees in whose shade they shall never sit.” Greek Proverb.

As this revolution gathers pace, trustees are being asked by settlors and beneficiaries more frequently to take into account environmental, ethical, and social considerations when investing the trust fund.

Whilst this, on the face of it, this sounds very positive, trustees have to be mindful of their overarching fiduciary duty to protect and grow the value of the trust fund that they have been charged with safeguarding.

The position when it comes to trustee investment has typically been per Cowan v Scargill [1985] that “The starting point is the duty of trustees to exercise their powers in the best interests of the present and future beneficiaries of the trust””. In the UK courts, the Crown Dependencies and other overseas jurisdictions that follow precedents set in the UK courts - that duty has been inseparably linked to investing of trust monies for the maximum financial return (whilst factoring in the risk of said investments).

The failure to invest appropriately can mean personal liability for trustees and trust companies to ‘make good’ the return that the beneficiaries could have reasonably expected had the trust fund been invested wisely.

Investment Returns

Whilst ESG portfolio returns over the last few years have often matched or outperformed their non-ESG peers, this has still been seen as dicey ground, legally, from a trustee perspective. Should the ESG bubble burst, trustees have been wary of how accountable they would be to beneficiaries for potentially having been seen to make investments based more on environmental or social considerations rather than pursuing maximised risk-adjusted returns.

That said, the tide seems to be turning in this line of thinking. Recent case law seems to provide a glimmer of hope for protections under law. Additionally, Guy Opperman MP noted in his ministerial foreword to a best practice guide for pension trustees on ESG investing that "It would take a brave trustee, though, to conclude that absolutely none of these issues are material, or that they are all solely matters of personal ethics".

It is becoming clearer that a negative ESG report or related incident can have a significantly adverse effect on a company’s profits and valuations – so a company’s ESG credentials are becoming something that is too big to ignore when it comes to trustee investment decision making.
Whilst there are still currently no direct protections under law for trustees making investments that do not solely consider the financial return, we recognise and understand why our clients may want to ensure that their trustee is committed to considering the ESG credentials of the investments it makes.

Suntera’s approach, whilst first ensuring that it is protecting client interests and that decision making is within the legal framework of the jurisdictions in which the firm operates, is based on the belief that trustee fiduciary duty can be balanced with also taking into account settlors’ and beneficiaries (including future and potential beneficiaries for dynastic trusts) environmental, social, and ethical considerations.

Acting in the best interests

ESG investment is a spectrum, and it is certainly not the case that it is always appropriate for every client to consider and implement a heavily ESG-focussed investment policy, nor is it something we would advocate for all clients. The last few years have shown, however, that you do not have to necessarily forego returns to pivot your portfolio to one that is more conscious of the impact that it has on the planet.

What we do believe, though, is that through open dialogue with clients, appropriate investment policy measures can be put in place if there is a genuine wish for part or all of a trust fund to be directed towards ESG focussed investments.

We believe that for a modern trustee, acting in the best interests of beneficiaries also means ensuring that investment decisions are aligned with beneficiaries’ ethics and morals (and being acutely aware of the direction of travel in thinking for future potential beneficiaries of trusts (including those as yet unborn).

It is no longer the case that there is a black and white choice between philanthropy and returns-focussed investment and through working closely with clients, we can look to put in place something that balances sometimes conflicting intergenerational viewpoints. Through careful drafting of trust deeds, investment policy statements, and other associated trust documents, ESG considerations can be factored into succession planning and trustee investment decision making right now – where it is appropriate to do so.

There is significant capital held within trusts globally and we believe that by partnering with a forward-thinking and ESG conscious trustee like Suntera, not only can family and corporate wealth remain protected and succession goals met for generations to come but that this wealth can also be a positive force within the world to help effect change.

Critically, these goals need not necessarily be in conflict with each other.

To learn more about our Private Wealth services, click here.

For more information about our ESG commitments, click here.