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Should Trustees Be Worried About Global Warming?
1 September 2020
These days it is hard to avoid the topic of human-made global warming and the consequences. As we have seen in the trend towards environmental, social and governance-themed (ESG) investment, the wealth industry regularly talks about using economic muscle to push change. One sector of the wealth sector is the trusts industry. Climate change will no doubt continue to be a worldwide topic of concern and will affect us all. The science is clear and reinforced by the extremity and increasing frequency of recent climate-related disasters such as typhoons, flooding, drought and, of course, the tragic wildfires in Australia. If that sounds alarmist, remember that in 2018 California had the deadliest forest fires in its history, while over 100 people died in wildfires in Greece. What steps should trustees be taking?
In this article, Henry Wickham, counsel at in Jersey, suggests how trustees should think about global warming, and what they can and should do about it.
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In the world of investment, there is growing momentum for change with investors calling for their money to make a positive impact on society and the world at large.
As to whether trustees can invest to address the threat of climate change, generally speaking, a Jersey trustee's powers of investment are wide, with article 24(1) of the Trusts (Jersey) Law 1984, as amended (the Trusts Law), stating that a trustee of a Jersey trust shall enjoy all the same powers as a natural person acting as the beneficial owner of such property.
However, this power is tempered in two regards, the first being that the trustee may only exercise such powers in the interests of the beneficiaries and, secondly, in accordance with the terms of the trust. Historically, the best interests of beneficiaries have been considered their best financial interests.
If a settlor, when establishing a trust, wishes for the trustee's investment outlook to be bound by concerns about the climate, then the trust instrument can be adapted accordingly. For example, certain express provisions can be included prescribing an investment outlook which is sensitive to carbon emissions.
Alternatively, the settlor can reserve certain powers to direct investments, as set out in the Trusts Law. Article 9A of the Trusts Law provides that a trustee acting in accordance with any direction given would not be acting in breach of trust. This could, for example, assist with mitigating the risk for a trustee in respect of ESG or impact investing which may lead to below-market returns.
If beneficiaries of an existing standard discretionary trust, without the kind of bespoke provisions referred to above, approach a trustee requesting that their investments do not contribute to global warming, then the trustee will need to carefully consider such requests in the context of their investment duties.
When it comes to the choice of investments, it is worth remembering that under the general duty of care expressed in Article 21(1) of the Trusts Law, the draftsperson seemed to have in mind the ordinary, prudent business person. In other words, the trustee should take care as an ordinary prudent person would should they be minded to make an investment for the benefit of other people for whom they felt morally bound to provide.
The starting point is that there is no absolute duty as to what you should or shouldn't invest in. Consistent with the prudent investor is the emphasis on good process which, in the context of addressing the risk of climate change, means that the trustee should use a framework to evaluate climate risk in terms of its investments.
If a trustee deems it in the best interests of the beneficiaries to decarbonise their investment strategy, what steps should it be taking? The standard for judging whether a duty has been breached under the Trusts Law is that of a reasonable trustee.
Therefore, there is no automatic liability if, with hindsight, the wrong decision was reached when deciding whether to invest if, at the time of such investment, the trustee acted reasonably. The courts accept that there is not always one way for a trustee to act.
However, given the law's emphasis upon trustees' actions being viewed through the lens of investment performance, it is recommended that trustees carefully record the considerations that have been taken into account in giving weight to climate risk in determining investments.
When dealing with investments, typically, a trustee will delegate the functions of administering assets to an investment manager. It is good practice to have an investment policy statement in place from the outset of any delegation. Such statement will be particular to the trust in question taking into account the needs of the beneficiaries and the attitude to risk.
A policy of socially responsible investing may be adopted whereby pollutant stocks or potential stranded assets are actively eliminated.
Noting the continuing duty to monitor the performance of the investment manager under the Trusts Law, any statement should be regularly reviewed in the context of performance.
The trustee will also need to determine how proactive it wants to be and what actions it will accordingly take. The degree of concern over the impact of investments on climate change may alter with the development in technology, generational changes, or even just changes in the beneficiaries' circumstances.
Therefore it would seem prudent to recommend an incremental approach to implementation to evaluate the effectiveness of the strategy, recognising that further steps may be taken over time as necessary.
It is said that the 20s is a critical decade for tackling global warming; there will almost certainly be more disclosure about what fiduciaries are doing, and people will increasingly want to know how their money is being invested.
Arguably, there is a heightened duty for trustees to consider the effects of climate change as a matter of course from a fiduciary perspective. As a forward-thinking jurisdiction, Jersey has been active in sustainable finance for some time. Being a jurisdiction with a wide range of flexible structures and with the knowledge, expertise and international relationships to support them, the island is well placed to ensure that settlors and trustees make the right choice to suit an investment outlook bound by climate risk concerns.
These days it is hard to avoid the topic of human-made global warming and the consequences. As we have seen in the trend towards environmental, social and governance-themed (ESG) investment, the wealth industry regularly talks about using economic muscle to push change. One sector of the wealth sector is the trusts industry.
Climate change will no doubt continue to be a worldwide topic of concern and will affect us all. The science is clear and reinforced by the extremity and increasing frequency of recent climate-related disasters such as typhoons, flooding, drought and, of course, the tragic wildfires in Australia. If that sounds alarmist, remember that in 2018 California had the deadliest forest fires in its history, while over 100 people died in wildfires in Greece.
What steps should trustees be taking?