The Heckerling Institute, a four-day conference on estate planning held in January, discussed many different topics, among which was the role of trustees in integrating environmental, social and governance criteria into trust investment strategies. There is a global trend, particularly among younger beneficiaries, towards sustainable practices and purpose-driven investments by trustees. This shift affects estate planning, wealth management and the implications of ESG investing for trustees necessitate clear trust documents that allow for ESG-focused investing to align with beneficiaries' values and interests, potentially enhancing family harmony at the expense of long-term investment returns.
The pros and cons of ESG investing have been debated in the management of university endowments, retirement funds and private wealth management. Pros include better alignment with beneficiary values, identification of companies with sustainable practices, potential reduction of long-term investment risks, and evidence that ESG investments can perform as well or better than traditional investments in the long run. Cons include complexity in implementing ESG criteria, potential for lower returns compared to traditional investments, lack of standardization in ESG criteria leading to inconsistencies and confusion, and differing views on appropriate ESG criteria among beneficiaries.
From a legal standpoint, ESG investing presents several considerations. Trustees, in making investment decisions on behalf of beneficiaries, must adhere to the standards of fiduciary duty, which encompass both the duty of care and the duty of loyalty. The duty of care requires trustees to manage investments with the same level of skill and caution that a prudent investor would employ. In the context of ESG investing, this could mean thoroughly researching ESG factors and their potential impact on investment performance. The duty of loyalty mandates that trustees act solely in the best interest of the beneficiaries. This could be challenged if a trustee's ESG investment decision is driven more by personal beliefs or societal pressures than by the potential return on investment. Furthermore, the lack of standardization in ESG criteria can lead to legal uncertainty, as there is no universally accepted definition of what constitutes an "ESG-compliant" investment. This ambiguity could potentially expose trustees to legal challenges from beneficiaries who disagree with the trustee's interpretation of ESG criteria. Hence, it is crucial for trustees to maintain clear, open communication with beneficiaries and to document all investment decisions meticulously, demonstrating that they have fulfilled their fiduciary duties.
These duties are relevant when managing ESG-focused investments, as trustees must balance the interests of current and future beneficiaries while adhering to the prudent investor rule. Trust modification statutes and Family Values Statements can guide trustees in ESG investing, with FVS fostering communication among beneficiaries, trustees and advisors.
The growing popularity of sustainable investing poses challenges for trustees in a complex investment environment. Modern trust provisions that allow sustainable investments and promote open dialogue among all parties involved in the trust are part of the solution. While settlors can shape the trust to reflect their intentions, they cannot override the fiduciary nature of the trustee-beneficiary relationship, potentially leading to disputes over the impact of settlor's intent on trustee's duties, particularly concerning investment directives.