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ESG Investments & The Scope of a Trustee’s Powers in Guernsey

Date: 23/11/2023 Type: Articles Topic: Private Client | Investment and HNWI’s |


One of the questions that trustees have been asking in recent years is to what extent they may use their powers to invest in assets that meet environmental, social and governance criteria (ESG investments). Although ESG may not be a new concern for many HNWs, many in the industry have seen an increasing number of clients prioritising ESG, and this issue will likely only become more relevant as society becomes more ESG-focused.

The question is especially pertinent for private trusts settled for the financial benefit of the beneficiaries. If the ESG investments yield lower returns in comparison to traditional investments, trustees may risk taking decisions contrary to the purposes of the trust. They may be placed in a difficult position where beneficiaries have competing views about ESG investments and may be wary of their decisions being subject to challenge.


Trustees' powers and duties

Under section 30 of the Trusts (Guernsey) Law, 2007 (the Trusts Law), subject to the terms of the trust instrument, the trustee has, in relation to the trust property, all the powers of a beneficial owner. This would include the power to invest the trust property. In addition, private trusts created for financial benefit usually include wide investment powers. The letter of wishes may also give direction.

These powers sit alongside the trustee's duties, notably in this context the general fiduciary duties under section 22 of the Trusts Law. These include to observe the utmost good faith and act 'en bon père de famille', which has been construed as meaning a duty to act as a prudent man of business and implying a standard of care similar to that required of trustees in England & Wales. Under section 23, the trustee must preserve and enhance, so far as is reasonable, the value of the trust property.

How are these powers and duties reconciled in the context of ESG investments?


Case law

With no case authority directly on point in Guernsey, English case law provides guidance. The traditional view, set out in Cowan v Scargill [1985] 1 Ch 270, was that where the trust was established to provide financial benefits, maximising the beneficiaries' financial benefit was normally the paramount concern for trustees. Trustees needed to exercise their powers in the best interest of the beneficiaries without regard to their own personal interests or views. This case concerned a pension scheme, but the Court said that the same principles applied to trustees of any other type of trust.

Similarly, in Harries v Church Commissioners for England [1992] 1 WLR 1241, in the context of charity trustees considering how to invest trust assets, the starting point was:

"[to seek] to obtain… the maximum return… which is consistent with commercial prudence… The choice of investment should be made solely on the basis of well-established investment criteria, having taken expert advice where appropriate and having due regard to such matters as the need to diversify, the need to balance income against capital growth and the need to balance risk against return".

There were exceptions, for example to accommodate objections on the basis of moral grounds conflicting with the objects of the charity, provided it did not pose a significant financial risk. An example of this would be a cancer charity not investing in tobacco products. The Supreme Court agreed, in the pensions context, in R (Palestine Solidarity Campaign Ltd v Secretary of State for Housing, Communities and Local Government [2020] UKSC 16.

However in a decision that has been regarded as a move away from the traditional view, Butler-Sloss v The Charity Commission [2022] EWHC 974 (Ch), stated that where charity trustees were of the reasonable view that particular investments or classes of investments potentially conflicted with the charitable purposes, they had a discretion to exclude them, to be exercised by reasonably balancing all relevant factors. This included the likelihood and seriousness of the potential conflict and of any potential financial effect of the exclusion of such investments. The trustees could take account of the risk of losing support from donors and damage to the charity's reputation generally and in particular among its beneficiaries.

If that balancing exercise was properly done and a reasonable and proportionate investment policy was adopted, the trustees had complied with their legal duties and could not be criticised, even if the Court or other trustees might reach a different conclusion.

This was a charitable trust but it is also worth noting that even in the context of a private trust, financial considerations are not always paramount. In, Representation of Y Trust and the Z Trust [2017] JRC 100, the Jersey Royal Court approved a variation of a trust to change the beneficial class to include the issue of same sex relationships, recognise illegitimate children and relax the criteria for adopted children to qualify as beneficiaries. In assessing whether the variation was for a beneficiary's benefit, “benefit” was not to be narrowly construed or restricted to financial benefit.


Points to note

Drawing the above together, when considering ESG investments the first step is of course to have regard to the extent of the trustees' powers in the trust instrument and the trust's purposes. Trustees should act honestly, reasonably and responsibly in reaching a decision concerning investment policy that is in the best interests of the beneficiaries. That includes, in the usual way, only taking into account matters that are relevant, ignoring irrelevant matters, acting impartially and not for an improper purpose.

Whilst the starting point in a trust for financial benefit is to maximise the financial return, this may not be the only consideration. Trustees should however be careful not to substitute their own ethical considerations against the best interests of the beneficiaries. They should also obtain professional advice on investments from a suitably qualified investment adviser, and carefully consider the advice.

Of course, financial returns and good ESG credentials may not be mutually exclusive. In fact, the Morgan Stanley Institute for Sustainable Investing's White Paper, Sustainability Reality - Morgan Stanley Institute for Sustainable Investing (2019) provided that research conducted on the performance of nearly 11,000 mutual funds from 2004 to 2018 showed that there was no financial trade-off in the return of sustainable funds compared to traditional funds, and they demonstrated lower risk. It would make sense that companies with bad ESG credentials may have lower value long term given the increasing importance of ESG. Going further, the United Nations Fiduciary Duty in the 21st Century Report of October 2019 expressed the view that failing to consider all long-term investment value drivers, including ESG issues, was itself a failure of fiduciary duty.

If the proposed decision is momentous, the trustees may consider obtaining the Court's blessing of the proposed decision, which could provide some protection against future claims. They may also consider obtaining indemnities from the beneficiaries. This may be appropriate where, for example, certain beneficiaries are pushing for a particular investment.




Abel Lyall, Iona Mitchell & Mariam Marquard - Mourant
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