On January 9, Amy E. Szostak, Jennifer B. Goode and Lauren J. Wolven will be presenting “It’s Not Easy Being Green—Is ESG Investing Sustainable for Trustees?” at the Heckerling Institute on Estate Planning. Jennifer shared with us specifics of the panel discussion, which will address the fiduciary implications of beneficiary-driven environmental-, social- and governance-focused investing. While many prior discussions of a trustee’s use of ESG-related strategies have evaluated such decision in a vacuum—with no input from the beneficiaries—the three panelists will reshape the conversation by placing the beneficiary’s values and influence at its center.
Setting the Stage
Amy, Jennifer and Lauren will first touch on the current plethora of ESG-related strategies available to investors and what they see to be industry trends. They’ll then shift gears to focus on non-concessionary ESG-focused strategies (strategies that pursue risk-adjusted returns through a thesis shaped by a particular ESG focus). Jennifer describes this kind of strategy as taking a road trip and deciding among different vehicles for the drive: You’re headed in the same direction regardless of your choice, but the car you pick may shape the impact of the ride.
Beneficiary-Led ESG Investing
The panel will next address the use of trust assets to provide a beneficiary with a nonfinancial benefit, such as a trust created to hold and manage a family home for the family’s use and enjoyment. Jennifer notes that the panel won’t be referring to an ESG-related outcome as a direct benefit to the beneficiary; rather, the nonfinancial benefit at the heart of their analysis is the beneficiary’s personal gratification from investing in line with one’s own values and interests. Amy will then explain how this type of benefit finds support in the psychological research behind the “Self-Determination Theory,” which links actions aligned with intrinsic motivations with an individual’s well-being.
ESG-Focused Investing and Precedent
The panelists also will comment on the novelty of ESG-focused investing in applying existing precedent. Notably, the common law duty of loyalty applies an irrebuttable presumption of breach to certain transactions under a “no-further-inquiry” rule. Past case law has applied this rule to situations involving a trustee’s financial self-dealing and transactions between the trust and parties closely related to the trustee. However, today’s ESG-focused strategies don’t fit squarely within the traditional definitions of self-dealing or conflict of interest, as collateral impacts from such strategies typically involve amorphous groups incapable of exercising significant influence over the trustee’s actions. Moreover, these strategies may not give rise to the same policy concerns underlying the no-further-inquiry rule, due to substantial oversight by federal regulators and self-provided indices by which beneficiaries may easily judge their financial performance. In answer to this uncertainty, the presenters will make the case for applying a less-restrictive, best-interests standard when evaluating the use of ESG-focused strategies under the duty of loyalty.
Amy, Jennifer and Lauren will conclude with an overview of the ways in which trustees can engage beneficiaries on these issues and how ESG-minded settlors might address the issue under the trust agreement. Lastly, they’ll highlight statutory fixes that could provide greater clarity for the creator and recipients of nonfinancial benefits, ESG-related or otherwise.