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Delaware Expands Investment Options for Trust Fiduciaries

The beneficiaries’ personal values may now be considered, which opens up investment opportunities.

A recent 52-word addition—just a clause actually—to Delaware’s statute regarding authorized investments for trusts is about to make things a lot more interesting for fiduciaries. Beneficiaries’ personal values may now be considered as fiduciaries manage trust assets. This opens many doors and will hopefully unleash investment creativity among fiduciaries.

Values-Based Investing

This change in Delaware trust law is one more step in the movement for values-based investing, which continues to gain momentum with recent launches of new socially responsible mutual funds, exchange traded funds and investment platforms. The news offers reports of millennials’ commitment to put their money where their values are by investing in companies and ventures that seek to do good—and not in those with a singular, and often short-sighted, focus on the bottom line. These new investors have joined the many early entrants into this movement to insist on a new meaning of maximizing shareholder value that goes beyond dollars and cents.

Value-based investing has evolved from the divestment movements of the 60s, 70s and 80s, which focused on intentionally excluding investments in certain industries, such as weapons manufacturing, tobacco and fossil fuels. Values-based investors now seek out investments in companies that score high on measures of environmental, social and governance practices, known as ESG ratings. These measures raise the bar on corporate responsibility, looking at all things “green,” from buying clean electricity to waste disposal; examining the social impact, from employee benefits to profit sharing with community groups; and rating governance, from diversity in upper management to avoiding conflicts of interest in board selection. 

ESG Ratings

As it turns out, ESG ratings not only offer a better match for many values, but also they’re proving to be a north star for good business practices in general, and for profits. Companies watching their green stewardship are less likely to have environmental accidents. Controversies about workplace discrimination will not only mean a low “S” (social) rating, but also probably also low workplace morale, more employee turnover and hence lower productivity for those companies. In most cases, the higher the ESG rating, the stronger the business and profits. It’s common sense.

As more and more investors insist on investments with high ESG ratings in their individual portfolios, grantors and beneficiaries of trusts are insisting on investments with high ESG ratings in their trust portfolios. 

When a grantor of a trust outlines his intent in the trust’s governing instrument, he may demand that the trustee invest with ESG ratings in mind or name an investment advisor to the trust who’ll do the same. The vast majority of trusts, however, are already in existence, having been created decades ago. For beneficiaries of these trusts, they often would have been disappointed to learn that the traditional prudent investor rules governing how trust assets must be invested limited their trustees with respect to investing in high ESG-rated companies. 

Modified Prudent Investor Standard

The recent modification to Delaware’s version of the prudent investor standard for trusts now allows a trustee to consider beneficiaries’ personal values when managing trust assets, and, thankfully, there are lots of options that values-driven fiduciaries can choose from, even in the conventional stock and bond market. Other traditional market options include mutual funds with LGBT lenses and bonds that support women entrepreneurs. One bank offers certificates of deposit with competitive interest rates that invest in Fair Trade coffee. Values-based investing will be limited only by fiduciaries’ knowledge of their options. 

B Corps

One such option that fiduciaries should consider as their investment outlook expands is the B Corporation. B Corps offer fiduciaries one-stop shopping for high ESG-plus-plus rated investments. To qualify as a certified B Corp, a company must meet a rigorous 200-point test, so investing in these companies guarantees strong values and strong businesses.

An exceptional aspect of B Corps is that they’re required to legally change their charters to reflect that decision-making must address all stakeholders, such as shareholders, employees, customers, suppliers and the environment. Between this legal requirement and the rigorous test to qualify as certified B Corps, these businesses offer a values opportunity for fiduciaries.

Direct Investing

Grantors of trusts may want to consider establishing their trusts in Delaware, not just for the recent expansion of its prudent investor statute to include the beneficiaries’ personal values when investing, but where the law holds the grantor’s intent as paramount. If the grantor directs that the trustee to make socially minded or impact investments, the trustee must do so. Better yet, the grantor can name an investment advisor well-versed and experienced in socially minded and impact investing to direct the trustee to make these types of investments. This is where the real prospects for trust investments lie: in direct investing in privately held companies and nonprofits.  

New Investment Choices?

Time will tell whether Delaware fiduciaries take advantage of their new investment choices. Foundations are permitted to invest with their values, but few do. Most elect to follow a 100-year-old paradigm of handing their endowments over to traditional asset managers for the greatest financial return with no concern for simultaneously using those investments to further their missions. Achieving growth and the mission aren’t mutually exclusive, but the myth continues that they are. Most foundation endowments are still invested in ways that work against the very missions of their holders, like environmental organizations investing in fossil fuels. A Philadelphia foundation working on poverty issues was surprised—horrified—to recently learn that it was invested in businesses that offer payday lending, a practice that perpetuates poverty.

There remains much fear by fiduciaries and trustees to invest outside of the traditional choices. We are creatures of habit and training. Millennials, however, seem to be developing different habits. They’re leading the way in values investing. Their demand for more holistic investments in trusts is now embodied in Delaware trust law—hopefully other states follow!

 

Trisha W. Hall is a partner at Connolly Gallagher in Wilmington, DE, and the former board president of the Untours Foundation. Elizabeth Killough directs the Untours Foundation, which owns Untours, the world’s first Certified B Corporation.

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