Trustees that are able to offer clients an ESG-compliant structure will be satisfying an increasingly popular and fundamental criteria for UHNW individuals and families. Investing to maximise return in an ethical manner is not a new concept; similar principles underpin long-established Sharia-compliant investing. However, a shift of ESG investment emphasis into the mainstream is a new trend, and is a criteria that trustees can satisfy. This emphasis has seemingly intensified as a result of Covid-19, with calls to "build back better" for the global recovery.

Trustees that are able to offer clients an ESG-compliant structure will be satisfying an increasingly popular and fundamental criteria for UHNW individuals and families. Investing to maximise return in an ethical manner is not a new concept; similar principles underpin long-established Sharia-compliant investing. However, a shift of ESG investment emphasis into the mainstream is a new trend, and is a criteria that trustees can satisfy. This emphasis has seemingly intensified as a result of Covid-19, with calls to "build back better" for the global recovery.

By ESG we mean a shift away from investments motivated entirely by maximising financial return, towards investments that also bring about an impact, ethical, sustainable or green return and good governance. There are multiple drivers for this change, but essentially, it is a desire to make money without causing damage to the planet, society, animals or other humans. This criteria sets a clear framework which a trustee can hardwire when planning or revisiting the structure.

Trusts and foundations are particularly appropriate because they can implement clear guidance from the original wealth-holders about how they want their capital invested through defined purposes or objects. Trusts and foundations can also be drafted to allow for both ESG and pure profit investment strategies by, for example, ring-fencing. Given the increasing popularity of an ESG-driven investment strategy, trustees that do include such an offering will appeal to modern family offices, UHNW individuals or the emerging, socially-conscious generation coming through existing structures.

For the trustee there is tension between meeting ESG objectives close to their settlors' hearts and simultaneously achieving a level of return to provide for the entire beneficial class and secure longevity for the structure. Through careful planning and communication the trustee will be best placed to meet any competing objectives and fulfil its fiduciary obligations.

Trustee duties

A basic premise of Guernsey and Jersey trust law is the obligation upon a trustee to not only preserve the trust fund, but also to enhance it. While settlors, beneficiaries and families may have clear ESG goals for their capital, their trustee must ensure that those investment goals fit within the surrounding structure.

Fortunately the Channel Islands are well placed to address this tension and form structures that permit the flow of funds into products that achieve ESG goals. The Channel Islands have led the way in establishing funds with ESG principles at the core, with Guernsey establishing a worldfirst regulated green fund regime: the Guernsey Green Fund. Yet, there remains a lag in developing globally-agreed ESG measures. The trust structures surrounding ESG investments can be tailored to facilitate an ESG investment strategy, while protecting the trustee. Or alternatively for existing structures, indemnities from the beneficiaries or court approval obtained.

Types of structures

When deciding upon the right approach, the trustee has a range of options to offer clients that can be tailored to provide an ESG investment angle, while simultaneously meeting the settlor's objectives. These are not new structures, but rather, tailoring conventional tools to allow the trustee to implement an ESG strategy.

If we consider firstly the commonly used discretionary trust structure, it is possible to adapt or widen the investment powers in the body of the trust deed and provide for a trustee to choose an investment option that gives an ESG return and for that to amount to enhancement. An alternative would be a reservation of investment powers to a settlor or the provision of an investment council to ensure an ESG investment strategy. A noncharitable purpose trust can, as the name suggests, set an ESG purpose for the entire structure, overseen by the appointed enforcer, an enforcer being an essential requirement for a purpose trust that is not exclusively charitable. With a Guernsey or Jersey Foundation a council is established on which family members can sit. The council can direct the investment strategy, and in that way provide the family with reassurance that their ESG investment strategy will be met. Another option is a private trust company or foundation, commonly known as a "PTC" or "PTF". Either a PTC or a PTF can be appointed as trustee and thereby direct or have an input upon underlying trusts and companies which in turn can implement an ESG strategy, while at the same time removing the scope of personal liability that would attach to a professional trust company as it is no longer acting as trustee in its own right. For existing structures that don't adequately provide a concerned trustee with scope to prioritise an ESG agenda, and there is no scope to vary the trust's terms in a way that is acceptable to the trustee, indemnities can be sought from the beneficiaries or if the beneficial class is open court approval may be warranted.

Conclusion

Trustees are used to facing challenges and balancing competing demands upon the funds under their stewardship. Being able to meet ESG investment objectives is increasingly becoming an integral part of a trustee's offerings. With clear drafting and choosing the right structure, a trustee will be able to deliver an ESG agenda while simultaneously protecting its personal liabilities.

While it appears that financial return is not sacrificed when choosing an ESG investment strategy, the prudent trustee should guard against future challenges if losses do arise from the implementation of such a strategy, when planning their structures. Further, the measurement of ESG return is evolving and so this is a challenge for a trustee seeking to demonstrate successful execution of an ESG investment strategy. Again with careful planning and the establishment of clear, common goals the trustee can deliver and crucially, demonstrate delivery. The Channel Islands have seized this shift of investment focus at the political, regulatory and grass roots level, giving it prime position on the global stage as we build back better.

Originally Published by Walkers, November 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.