9 août 2022
ESG (environmental, social and corporate governance) has gained significant momentum in the investment market over the last decade. The popularity of these investments has been supported through a demonstration that they can generate significant investment returns, in some cases outperforming the more traditional non-ESG market.
The tension between ethics and investment return will remain a feature as shown over the last few months with the outperformance of energy sector shares resulting from the Russian invasion of Ukraine. As the FT reported, this "has presented one of the biggest tests for eco-conscious investors since the emergence of the ESG investing phenomenon."
Despite this tension, in our experience clients have become increasingly keen to invest with a more ethical focus. Our recent global study- World Shaping Wealth: The Impact of Affluence on the Next Economy – found that 77% of Ultra High Net Worth individuals are prioritising using their wealth to have a long-term positive impact on society and for charitable aims.
Clients are concerned about investment performance, risk management and the opportunities that ESG investments provide. UHNW clients are focused on the legacy that they will leave behind and ESG investing can be an important element of that. While clients from different generations and different jurisdictions around the globe are investing with ESG and/or impact goals in mind, our anticipation is that, with the significant wealth transfer to the next generation that will take place over the next few decades, ESG investments will be driven forward by the millennials and then Generation Z.
Last year it was predicted that millennials could place between $15 trillion and $20 trillion into ESG investments in the US alone in the next 20-30 years. Although, of course, it should be kept in mind that there is an element of subjectivity to ESG and some clients will want to go further and invest for impact and/or with purely philanthropic objectives.
Clients will want to make ESG investments in their personal names but also through family holding vehicles which they have created, including trusts. With trusts, we anticipate that trustees will increasingly find themselves being asked to invest with ESG objectives in mind. Accordingly, trustees will need to balance the settlor's wishes in this regard with their fiduciary duties.
So how can trustees choose investments (ESG or otherwise), and what are their fiduciary duties for these decisions?
Under English law, those duties include a duty to act in the best interests of the beneficiaries, which has generally been understood to mean their best financial interests. The question of how trustees' ethical objectives interact with the duty to pursue financial returns is not a new one, and this point has been litigated before.
For example, the well-known case of Cowan v Scargill  concerned the British trade unionist and President of the National Union of Mineworkers (NUM), Arthur Scargill, and the pension fund of the National Coal Board. In summary, the NUM (which appointed certain of the pension trustees) wanted the pension fund to avoid investing in new overseas assets and to withdraw investments from industries which competed with coal. Their preference was for the investment strategy to support the British coal industry. Sir Robert Megarry VC held that the trustees of the pension fund would be in breach of their fiduciary duties if they followed the direction of the NUM.
Trustees as fiduciaries cannot take their own social and political views into account when acting as trustees, and must exercise their discretion independently. In terms of the appropriateness of the proposed investments, it was stated that "the best interests of the beneficiaries are normally their best financial interests." If non-ethical investments "would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by reason of the views that they hold."
So, without specific provision in the trust instrument, trustees cannot allow ESG goals to override their duty to pursue financial returns, irrespective of the wishes of the settlor or beneficiaries. Of course, where ESG investments outperform more traditional asset classes, then there is a marriage of convenience.
Trustee duties can be modified under the trust instrument in order to reflect particular goals of the settlor. For example, a trust deed might prohibit the trustees from investing in tobacco companies or in the non-renewable energy sector. As held by Green J in the recent well-reported case of Butler-Sloss and others v Charity Commission for England and Wales and another  (which concerned a charitable trust and the extent to which the charity trustees could have regard to achieving the charitable purpose through their investment decisions) "where specific investments are prohibited from being made by the trustees under the trust deed or governing instrument, they cannot be made." However, it still does not remove the primary duty for the trustees to obtain the best financial return for the beneficiaries.
For new trusts, clients can from the outset include express provisions to encourage the trustees to make ESG investments, including appropriate trustee exoneration provisions. Existing trust instruments could also be modified where there is the power to do so.
There are other techniques beyond tweaking the investment powers and exoneration provisions in a trust instrument, particularly when working outside the confines of English law. For example:
Alternatively, many jurisdictions provide for other family succession vehicles, such as foundations. The foundation council members have a duty to ensure that the objects of the foundation are achieved, and the objects can include provision for ESG investments, in addition to benefitting specified beneficiaries.
Where there are UK resident beneficiaries, it will be necessary carefully to consider the UK tax position concerning reserved powers or the use of vehicles not recognised under English law, such as foundations.
There are various factors to consider when choosing a jurisdiction for a holding structure and flexibility around ESG investments is one of the factors we can consider when helping clients to choose a jurisdiction. We anticipate that some jurisdictions might even adapt their trust laws in order to offer a more attractive environment for clients with ESG goals.
As always, we continue to monitor the ever-evolving landscape so that we can guide our clients towards the decisions which are right for them, whether to support their ESG goals or otherwise.
Our market leading International Private Wealth team is made up of over 100 lawyers across 16 jurisdictions. We deliver cohesive ESG reviews for clients across multiple sectors and related advice on areas including corporate governance, IP, data privacy and compliance, fiduciary relationships, philanthropy and investments (working alongside investment professionals). If we can support you or your clients then please do not hesitate to get in touch.
par Alexander Erskine et Alison Cartin
par plusieurs auteurs