Trusts And ESG - Fad Or Future?

• Published date: 20 December 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Trusts
• Law Firm: Withers LLP
• Author: Ms Dawn Goodman, Sarah Aughwane and Olivia Turner

ESG is moving from buzzword to mainstream. But against the backdrop of climate change and a pandemic that has exacerbated social inequalities, what does ESG mean for trusts?

For investors wishing to put their own money where their morals are, the decision to invest in environmental and socially responsible vehicles is straightforward. But what if you are investing someone else's money?

The story so far'

Trustees have previously been wary of ESG, and with good reason. In the early days, the balance of risk and reward in ESG investments was not attractive. Rating and monitoring of credentials - as trustees are obliged to do - has also been difficult.

Trustees are duty-bound to act in the best interests of their beneficiaries (Cowan v Scargill [1985] Ch 270). That duty is been inextricably linked to investing - or instructing managers to invest - for the maximum financial return having regard to the trust's risk profile.

The penalty for failure can be personal liability to make up the difference between the return achieved and that which the beneficiaries could reasonably have expected.

To add to the uncertainty, for trustees managing the views of different generations of beneficiaries, the problems presented by ESG can be serious.

For example, older beneficiaries' views on appropriate investment and tolerable returns can conflict with the sensibilities of their younger companions. According to the Saltus Wealth Index, young investors in the UK (aged 18-24) are over three times as likely to invest in ESG, green and impact funds than older people (aged 65+).

That places trustees trying to manage and accommodate the interests and priorities of both groups in a difficult situation.

Against that backdrop, choosing to exchange financial return for environmental, social or sustainability gains has - in the past - been a bold move. And a move that many trustees have avoided, sometimes at considerable cost to the relationship between themselves and at least some of their beneficiaries.

Where are we now'?

The investment landscape is evolving though.

Initially, many ethical funds and other socially responsible investments appeared to have outperformed the market. For example, Accenture and the World Economic Forum found that companies that go above and beyond their peers to respect the environment and social issues generate at least 20 per cent more in profit.

However, the ESG revolution has recently faltered.

Critics dismiss ESG investing as a feel-good strategy...