Trustees, ESG and Investments – key considerations

Whereas previously beneficiaries and settlors often prioritised financial returns above all else, the younger generation of beneficiaries see wealth not just as a means of preserving capital but as a tool for driving positive, long-term change. They are more likely to advocate for investments that align with their values, prompting trustees to reconsider traditional investment approaches and instead consider investments in companies or funds with strong sustainable, ethical principles and environmental, social, governance ("ESG") credentials to better reflect their evolving priorities.

However, the need to take into account sustainable and ESG considerations when making investments can often raise concern amongst trustees. Traditionally, trustees have been obligated to act in the best financial interests of the beneficiaries and this has meant preserving capital. However, as beneficiaries are increasingly pushing for investments that reflect modern morals, trustees are increasingly challenged to determine whether and how these preferences may be integrated without breaching their duties and whether they may, in fact, favour a more ethical investment over a more profitable one.  

Can ESG and sustainable investments be a breach of a trustee's fiduciary duties?

Under the Trusts (Guernsey) Law, 2007 (the Law), a trustee has a duty to act "en bon père de famille"¹, which means that the trustees must act as a prudent man of business² and act in the best interest of all the beneficiaries. In practice, the duty to act in the best interest of all the beneficiaries is usually interpreted to mean in the best financial interests of the beneficiaries³.  

Pursuant to the Law, a trustee shall also, subject to terms of a trust, "preserve and enhance, so far as is reasonable, the value of the trust property"⁴ and, where a trust has more than one beneficiary the trustees, "shall be impartial and shall not execute the trust for the advantage of one at the expense of the other"⁵.  

In Cowan v Scargill, Megarry VC stated: “….In the case of a power of investment, as in the present case, the power must be exercised so as to yield the best return for the beneficiaries, judged in relation to the risks of the investments in question; and the prospects of the yield of income and capital appreciation both have to be considered in judging the return from the investment.” 

Trustees may be concerned that in placing ethical considerations at the heart of investment decisions rather than seeking the highest possible financial return, such decisions may be in breach of their fiduciary duties, particularly if the sustainable investments underperform or if other beneficiaries challenge such decisions.

However, in the case of most Guernsey trusts, the duty to preserve assets and act impartially is often expressly excluded by the terms of the trust instrument. Trustees are also typically granted wide discretionary powers in respect of investments, often having all the powers of a beneficial owner. This allows them significant flexibility to manage assets as they see fit, including the ability to invest in a broad range of assets, including investment in speculative and wasting assets. 

In the case of Sarah Butler-Sloss & Others v Charity Commission [2022] EWHC 974 two charitable trusts sought to adopt an investment policy to exclude any investments which did not accord with the Paris Climate Agreement, notwithstanding that such strategy may have been detrimental to the financial rate of return. The England and Wales High Court (the High Court) ruled that there is no definitive rule which mandatorily requires that a trustee seeks the best financial return and that trustees have wide discretion to exclude certain investments on non-financial grounds. In coming to this decision, the High Court outlined that: "…trustees are required to act honestly, reasonably (with all due care and skill) and responsibly in formulating an appropriate investment policy that is in the best interest of the charity and its purposes… if that balancing exercise is properly done and a reasonable and proportionate investment policy is thereby adopted, the trustees have complied with their legal duties in such respect and cannot be criticised even if the court or other trustees might have come to a different conclusion." 

Thus, when making investment decisions which are based on ESG and sustainable principles, trustees are subject to the same fiduciary principles which apply to any other decision they may make. The investments must be evaluated with the same level of care, due diligence and accountability as all other investment choices. The courts will not generally interfere with such decisions. 

It is not unusual for trustees to take into account the changing wishes and circumstances of beneficiaries when exercising their powers and therefore it is difficult to see why the exercise of a trustee's investment powers to invest in ethical and sustainable investments should be any different. In the matter of the May Trust [2021] (1) JLR 66, the Royal Court of Jersey held that when making distributions for the benefit of a beneficiary, the moral obligations and views of the beneficiaries should be taken into account. It is considered that the same principles would apply when a trustee is making investment decisions, as such powers are also to be exercised in the interests of the beneficiaries. 

Changing landscape 

ESG considerations are no longer confined to moral or ethical viewpoints -they have become essential financial risk and opportunity factors. Increasingly, the long-term success and sustainability of investments are tied to a company’s or asset’s ESG profile. For instance, poor environmental practices may expose a business to regulatory penalties, environmental disasters, or reputational harm. Weak governance structures can lead to mismanagement or corruption, while poor social practices can result in consumer backlash or workforce instability. These factors can directly impact profitability, valuation and investment performance over time. 

Because of this shift, trustees who ignore ESG factors may inadvertently expose trust assets to hidden or growing risks. For example, investing in industries reliant on fossil fuels or with poor labour practices may lead to stranded assets or declining market relevance. Conversely, companies with strong ESG credentials are often better positioned to demonstrate resilience, innovation, and long-term growth. 

It seems therefore that ESG may increasingly become a critical, rather than an optional, component of fiduciary responsibility in ensuring the preservation and enhancement of trust value for current and future beneficiaries.

How can trustees mitigate risks?

1. Trustees should carefully check terms of the trust instrument to ascertain what investment powers they have and what (if any) statutory duties have been expressly excluded by the terms of the trust instrument for example the duty to preserve and enhance trust assets and the duty to act impartially between beneficiaries.
   
   
2. Trustees should obtain financial and investment advice from appropriately qualified experts so that they can make an informed decision prior to making any investments. 
   
   
3. Trustees should rigorously document all decisions in respect to any investments. 
   
   
4. Trustees should consider diversifying assets by investing in well-performing businesses that have positive financial returns as well as companies with strong values and keep such investments under regular review.
   
   
5. Trustees should consider obtaining an indemnity from the beneficiary/ies requesting such investments to cover the trustee in the event of any losses made as a result of such investments.

Our Private Capital and Trusts team can advise on any questions you may have in respect to the above.

_{1 Section 22(1) of the Law;
2 Spread Trustee Company Limited v Hutcheson [2012] 2 AC 194;
3 Cowan v Scargill [1985] Ch 270;
4 Section 22(b) of the Law;
5 Section 29 of the Law;}