“Where unethical investments would be more beneficial to beneficiaries than other investments, the trustees must not refrain from making the investments by virtue of the views they hold.” (Cowan v Scargill 1985)
Increasingly trustees are saying that they would like to have more ethical investments in their portfolio. Unfortunately, it is not that simple. For one thing, ‘ethical’ means different things to different people. Secondly, it is not exactly the same as ‘green’ or ‘Environmental, Social and Governmental issues’, although I am going to use the word ‘ethical’ in this article for simplicity. Lastly, the law may actually say it is beyond the trustees’ powers, exposing the trustees to potential breach of trust claims.
The issue can perhaps be illustrated by imagining you have a family trust run by a solicitors’ firm. Would the discovery that your solicitor spent their weekends as a Just Stop Oil protestor be something to applaud, or a cause for concern? Might they be refusing to invest your family money in the oil sector, or in mining, or in industrials, or in companies which are themselves tainted by dealing with the oil sector? What consequence might that have on the performance of your family trust’s investment portfolio, on which future generations could be dependent?
In summary, may I invest ethically?
- As a private individual – yes. You may do whatever you like with your own money;
- As a trustee of a family trust or a pension fund – not usually. Looking after someone else’s money is fundamentally different;
- As a trustee of a charity – it all depends. Unlike a family trust, you have charitable purposes which you have a legal duty to advance;
- As someone’s attorney – it all depends. The wishes of the donor should be given appropriate weight but do not predominate.
The four categories should be considered in more detail.
1. The private individual
I once came across an estate where the deceased had invested in accordance with his strongly-held belief that the end of the world, and certainly the Western world, was imminent. (A global pandemic and a new European war later, it no longer seems quite so remote.) The legal position is clear: an individual has complete freedom how they invest their own money. That includes the solicitor in the earlier example who protests at weekends and is completely free to be influenced by his own individual views so far as his personal pension or investments are concerned.
2. The trustee of a private family trust or pension fund
They must prioritise financial return and not let their personal views intervene. The quote at the top is from a case involving Arthur Scargill. He was the leader of the Miners’ Union and public enemy no. 1 so far as British Prime Minister Margaret Thatcher was concerned (and I suspect the feeling was mutual). Scargill disliked all energy businesses which competed with coal. He also disliked energy companies based on the continent who were competitors with Britain. As a result of his personal views, he refused to sign off on an investment policy for British Coal’s Pension Fund, of which he was a trustee. The judge said he was wrong to let his personal views interfere with his duties as a trustee, which including maximising return for the deceased coal miners’ widows (who might actually have reasons to dislike the coal industry). This case is clearly relevant to our solicitor who joins protests in his spare time.
3. The charity trustee
A charity is in a fundamentally different position from a private family trust, since it has charitable objectives, not just human beneficiaries. Can the Salvation Army invest in armaments to provide better returns? This was the subject of Major Barbara, a play by George Bernard Shaw. Can the Church of England invest in countries with institutionalised racism? This was a question the Courts were asked by the Bishop of Oxford, Richard Harries in 1992. Or can an environmental charity exclude investments that do not accord with the Paris Climate Agreement signed in 2016 from its portfolio? This was a question asked recently in a 2022 case Butler-Sloss v Charity Commission.
The court declined to resolve the issues for the church conclusively in the Harries case. It was stated that the starting point for all charities is to maximise financial return. Thirty years on, with ethics and climate change having risen in public awareness in the West and elsewhere, progress has finally been made. The judge in the Butler-Sloss case said that trustees have power to exclude potentially lucrative investments where:
- Such investments conflict with the charity’s purposes (e.g. a cancer charity might decide to avoid investing in tobacco companies);
- Such investments could reduce support for their charity or harm its reputation, particularly amongst its supporters or beneficiaries (remember Wonga, for example, which did nothing to improve the public perception of the Church of England); and / or
- Avoiding such investments would protect or enhance the financial value of the charity’s returns over time, for instance because the trustees consider their ethical practices to be unsustainable.
As always, the decision to exclude any lucrative investments for one of the reasons above must be properly and reasonably considered, having taken into account all relevant factors. These include the effect of the decision on charity’s reputation and its beneficiaries.
4. The attorney
Like a trustee, the attorney stands in a fiduciary relationship to the person lacking capacity. As one 1886 case put it, “the duty of a trustee is not to take such care as a prudent man would take if he only had himself to consider; the duty rather is 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 obliged to provide.” In the case of “Mr Doomsday” from my earlier example, if he lost mental capacity at a relatively young age and required care, there is no doubt that an attorney should prioritise funding his care above that attorney’s personal preferences, or Mr Doomsday’s personal choice of investments.
A reasonable balance appears to have been struck in the case of charity trustees and attorneys. The conspicuous outlier is the trustee of the traditional family trust. What is the combined value of all private trust portfolios in the UK? Is it right that there should not be a mechanism by which ethical considerations, including of a dark green variety, may be introduced by the person setting up the family trust?
While it may be too late for existing trusts, consumer choice should, I suggest, be introduced routinely into the setting-up of family trusts going forward. Although defining ‘ethical’ investments is harder than it sounds (and that is what defeated the court in the Harries case), would-be settlors or testators should be given options to explore. These could include making the trust subject to the law of another jurisdiction, or introducing a protector whose approval is required to the trust’s investment policy. After all, some things may well be of greater value to future beneficiaries than purely financial return.
For the avoidance of doubt, we would welcome the chance to explore options with clients who may be serious about bringing ethical factors into their succession planning.
 For those who are interested, a more technical version of this blog with footnotes is available on request.
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