The words “preservation and protection” focus on one of the key features of a trust: that the assets held within are to be meticulously and carefully invested and managed by the trustee in line with the terms of the trust stipulated by the settlor.
The usual starting point in the selection of investments is whether they are relatively safe as well as profitable. Investment decisions should be both cautious and careful. Both by Act of Parliament and by common practice, the range of permissible investments, absent express provision to the contrary in the trust, has generally been tightly constrained. Similarly, the potential conflict between those more interested in income and capital respectively (of which more below) required, in the absence of clear distribution provisions, careful balancing.
Unsurprisingly, few trustees have been willing in the past to take investment or distribution decisions based on the inherent “goodness” of a cause for fear of being sued for breach of trust. The idea of what would now be called an “impact” or “ESG” investment would be something to avoid.
That is not to say that there has been no thought given to the nature of an investment other than whether it produced an acceptable level of profit. The investments in a trust portfolio could give and have given rise to controversy and there have been many prominent examples: in the Cowan v. Scargill case in 1984, there was substantial argument as to whether trustees could adopt and follow ethical investment policies and what such policies were. The court’s decision, in short form, was that trust decisions were to be made in the best interests of the beneficiaries of the pension trust.
The entitlement of trustees to adopt particular investment policies, whether of their own initiative or under pressure from others, has been largely considered in relation to pension trusts. However, does that mean that it is not an issue, actual or potential for the trustees of private trusts?
Trusts and their express provisions or objectives differ, but many of what may be called “family trusts” – trusts established by the settlor for the benefit of a more-or-less broadly defined family – have typical common features. This includes providing benefits for multi-generational beneficiaries, with very specific terms.
Multi-generational trusts raise several issues for trustees if the terms of the trust created by the settlor are not specific as to who gets what and when. There is thus an inherent potential conflict between the interests of those beneficiaries who receive benefits in the here and now and those beneficiaries whose benefits come later.
One such potential point of contention is the question of utilising assets for “social impact”. Can trustees actually insist upon implementing ESG considerations? If they can’t, but the trustee is sympathetic to the cause, can it safely – i.e., without breach of trust – make such investments anyway?
Unless the terms of the trust expressly permit it, or all of the beneficiaries with the capacity to do so agree, it is highly unlikely that any one beneficiary or group or generation of beneficiaries will be able to force a trustee to adopt a particular policy of investment which conflicts the trustee’s duty to preserve and protect the trust assets and to act in the best interests of all of the beneficiaries.
The beneficiaries from whom the pressure comes are free to invest whatever is distributed to them from the trust as they see fit. If the trustee has power under the trust to do so, and the pressure to invest in impact investments comes from a significant number of beneficiaries, then it may decide to create a new trust with power to invest for impact rather than principally for financial return and appoint (i.e. transfer) some of the assets from the original trust to the new trust. The beneficiaries of the new trust may be those from whom the pressure came – and, again if the trust terms permit it, the same beneficiaries may be removed from the original trust.
As an alternative, could a trustee merely invest in impact investments? If so, trust terms are of vital importance. In the absence of a clear guide as to their powers of investment and the implementation of those powers (coupled with a suitably worded clause excluding liability for investment decisions), conscious investment in loss-making or low-return investments runs a clear risk that they will be in breach of trust on many accounts.
There is no empirical evidence as to whether or not the pressure to invest in impact investments has increased over time. The growth in intra-trust disputes between generations is, however, a depressing phenomenon for those who act as or advise trustees and it is not difficult to predict that a growth of investment policy-related disagreements is likely.