Sustainable investing is having its moment as high-net worth individuals, investors, entrepreneurs, business people and other agents of transformation seek out investments with a view to providing blended value – financial returns but also a positive social and environmental impact on society.
The younger generations of wealth-owners - millennials and Gen Zers - are leading the trend by increasingly investing in ESG-compliant1 companies that adhere to the stakeholder model and a better stewardship of the environment. ESG, which is often used interchangeably with the term “sustainable investing” is increasingly tied up to a company’s long-term financial performance and success. As such, more and more high-net worth wealth-owners are looking to integrate sustainable investing insights into the traditional investment strategies of their family offices and asset-holding structures, which in turn affects their fiduciaries, advisers and other service providers.
Relevance to fiduciaries
Fiduciaries, in particular trustees and family offices, that are considering a sustainable investment path, should carefully consider their powers and obligations and how ESG factors would affect them in the course of their respective offices.
One of the core functions of a family office will be oversight and management of the financial assets of the family and the key question is likely to be how the family office can protect itself against the risks inextricably linked with new and potentially speculative investment strategies, which the family may wish to pursue. For any fiduciary it will be important to ensure that they have the authority to make sustainable investments, as well as to consider any restrictions and stipulations imposed by the family, for example avoiding investments in businesses that are viewed as unethical or environmentally unfriendly. What if younger family members want to commit to impact investing, such as seeking investments that contribute measurable solutions to global challenges like the United Nations Sustainable Development Goals, but the older generation has a bias towards sustainable businesses and investments altogether? The focus for family offices is likely to be how to manage the expectations of different family members and avoid conflict.
In the case of trustees, most modern Guernsey trust instruments tend to give trustees the widest powers to invest in such investments as they think fit. As trustee of a Guernsey trust has “all the powers of a beneficial owner”2, the trustee has the power to invest as if the trustee were the sole beneficial owner of the trust property, which he must exercise subject to the terms of the trust and in the interests of beneficiaries. It is commonly held that to act “in the best interests of beneficiaries” means their best financial interests, although trustees can take ethical considerations into account where two investments are equally suitable3. However, in the current global environment the trustees simply cannot ignore the likely consequences of ESG factors on the financial value of investments when fulfilling their primary duty to act in the best financial interests of beneficiaries, as it is now generally accepted that companies with poor ESG ratings are at considerably higher risk of financial losses and potential reputational harm affecting the entire business.
Under Guernsey law, the overriding duty to act ‘en bon pêre de famille’4 will apply to trustees’ investment duties. In broad terms, the duty follows the “prudent person of business” rule under English law and requires “… to take such care as an ordinary prudent man would take if he were minded to make an investment for the benefit of other people for whom he felt morally bound to provide”5.
Underestimating ESG risks is not prudent and trustees should factor ESG principles into their investment decisions. This is also relevant in appointing professional investment managers, whose sustainable investing capabilities should not be presumed, and in making decisions as to investment objectives and asset allocation. There is also a statutory duty to “preserve and enhance, so far as reasonable, the value of the trust property”6, which will need to be considered when making investment decisions unless it is excluded under the terms of the trust.
For the trustees, the starting point will be to examine the terms of the trust, in particular the investment clauses and any duties owed by the trustees. Consideration should be given to including specific provisions in the trust instrument giving the trustees express power to invest in sustainable investments combined with a statement of investment principles recording the settlor’s intentions concerning the sustainable investing strategy. Alternatively, the family’s vision on sustainable investments could be set out in the family charter or a letter of wishes, including their commitment to integration of ESG principles into the investment strategy of their asset-holding structures/ family offices and guidelines to relevant fiduciaries in respect of such investments. Any exclusionary policies, where families reject investments that do not meet their values, should be confirmed with the wealth-owners. The family office should also seek clear agreement with the wealth-owners as to the limits or guidelines on the level of risk that they are prepared to accept. Investment mandates should accurately record these commitments, so that the family office or trustees can monitor the performance of an investment manager accordingly with a view to taking the appropriate action, including removing it, should it be the cause of consistent investment underperformance. It is also important to keep the investment strategy under review and report performance on a consistent basis to families/beneficiaries.
In the case of outdated Guernsey law trusts that cannot accommodate future beneficiaries’ needs in the context of the new global reality, it may be possible either to amend trust provisions, if this is allowed under the terms of the trust, or apply to the Royal Court of Guernsey to vary the trust. If, for example, the settlor wants to focus on pure impact investing, which arguably could create greater risks for trustees than simply making ESG investments in the best financial interests of the beneficiaries, a safer option from a trustee’s perspective, may be to form a reserved powers trust. Such trust provides for the manner in which the trust fund is managed and invested to be directed by means of a “prescribed direction” by a third party (typically the settlor or primary beneficiary) who is known as the power holder. Under Guernsey law a trustee who acts in compliance with a prescribed direction will not, by reason only of such compliance, act in breach of trust7. As such, whilst the trustee of a reserved powers trust has no investment function, it should take reasonable steps to satisfy itself that the power holder is acting within its powers. If the power holder is a fiduciary, which would usually be the case with professional investment managers, and appears to be acting in breach of its fiduciary duties, the trustee can no longer stay passive and should consider taking action (which may involve not complying with a prescribed direction).
Other possible options include establishing a stand-alone structure, such as a Guernsey Private Trust Company (a “PTC”) or a Guernsey foundation, dedicated to meeting the investing objectives of the family separate from the family’s existing asset-holding structures. Broadly, this would also mitigate the risk of cross-contamination between structures. A Guernsey PTC will act as trustee of a discretionary trust with the board of the PTC taking strategic investment decisions concerning an ESG strategy, thereby removing the scope of personal liability that would attach to a professional trust company were it to act as trustee of such trust. A Guernsey foundation can be established for either a specific purpose(s) or to benefit beneficiaries or both. However, if the family is more familiar with trusts than foundations, a Guernsey purpose trust, which can be formed for any purpose, could be a suitable vehicle for any impact ventures, e.g. “to support organisations or projects that benefit clean energy, health, education and microfinance and are often overlooked by traditional investors.” A Guernsey purpose trust, which is often used in family office structuring, would also have the advantage of simplicity and cost-efficiency with the trustees and enforcer conferring a top layer as a check and balance.
From a private wealth perspective the trend in sustainability is still growing in momentum but is here to stay. If fiduciaries are focusing purely on financial returns in their investment decision making, they may not only miss the macro-trends that will affect them in the long run, such as the changing preferences and concerns of new generations towards investments, but could also be failing their fiduciary duties if they fail to incorporate financially material ESG factors into their investment decision making. With Guernsey’s world’s first regulated green fund regime, sustainable finance strategy, and regulatory and legal framework Guernsey trustees and family offices are really well placed to rise to the challenges of managing ESG factors and helping families transition to more responsible investment, but they should also be mindful of risk-management, which should not be understated.
1. ESG stands for environmental, social and governance. 2. The Trusts (Guernsey) Law, 2007, s 30. 3. Cowan v Scargill  Ch. 270 4. The Trusts (Guernsey) Law, 2007, s 22. 5. Re Whiteley (1886) 33 Ch. D. 347 6. The Trusts (Guernsey) Law, 2007, s 23 (b). 7. The Trusts (Guernsey) Law, 2007, s 15 (3).
This article first appeared in the ThoughtLeaders4 Private Client magazine issue 5, December 2021.