Trusts: thinking about environmental, social and governance investing

Trusts: thinking about environmental, social and governance investing

Group News posted in on 21 June 2018| comments
audience: The Boston Foundation | last updated: 21 June 2018
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Families utilizing trusts to plan for the future management of assets, as well as beneficiaries of existing trusts, are increasingly interested in thinking about how trust assets can be invested in ways that reflect their values, beliefs and desire for impact on society. Investment strategies that incorporate these ideas are sometimes referred to as responsible investing, socially responsible investing, sustainable investing or impact investing and, more recently, environmental, social and governance (ESG) investing.

What is socially responsible investing?

Until recently, socially responsible investing strategies focused on excluding companies involved in certain products such as weapons, firearms, tobacco, alcohol and/or those companies in conflict with their religious beliefs. Such strategies were thought to sacrifice returns by limiting investment options. In the past 10 years, however, there has been a shift in such investment strategies toward the integration of environmental, social and governance factors into investment portfolios.

What is an ESG integration approach to investing?

The ESG integration approach starts with traditional financial analysis to identify the highest performing companies and then considers ESG factors not typically used in traditional market data, with an emphasis on maximizing financial gain.

What additional factors does ESG investing consider?

ESG factors can include issues that are as diverse as climate change regulation, labor rights, employee work conditions, taxes, safety protections in place to avoid environmental disasters, bribery and corruption, changing demographics and consumer expectations, all of which could potentially impact the long-term success of a company and might provide insight into long-term risk.

Is ESG investing appropriate for a trust?

Implementing an ESG integration investment strategy for trust assets intersects with a trustee’s duty to invest trust assets prudently. Under Massachusetts law, unless the language of the trust instrument provides otherwise, a trustee is under a duty to invest trust assets as a prudent investor would, while considering the purposes, terms and other circumstances of the trust, and while exercising reasonable care, skill and caution. Although it is unlikely that an ESG approach to investing would run afoul of a trustee’s duties, it remains an unsettled question exactly what a trustee’s duties are with respect to implementing an investment strategy aimed at pursuing non-financial benefits. However, the terms of the trust can alter or eliminate the trustee’s duties.

What can be done if there is an interest in ESG investing for trust assets?

Individuals interested in ESG integration, or other investment strategies with non-financial benefits, should consult with an estate planning attorney regarding how a revocable trust can be tailored or modified to permit, encourage or even require that a trustee pursue the desired type of investment strategy.

For existing irrevocable trusts, beneficiaries should discuss other options with an estate planning attorney, which may include beneficiary consents, decanting or non-judicial settlement agreements.

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The Boston Foundation
75 Arlington Street 10th Floor
Boston, MA 02116
United States
Phone: 1 617-338-1700
Fax: 1 617-338-1605

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