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Live from Heckerling: Is ESG Investing Sustainable for Trustees?


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The letters ESG have quickly become one of the most controversial topics in the financial services industry. Be it a simple question as to what constitute environmental, social and governance concerns, a discussion of whether considering these aspects actually contribute positively to portfolio performance or consternation over the more cynical applications of these factors to “greenwash” otherwise bad actors, advisors are constantly grappling with the new challenges presented by these factors.

But hand wringing over ESG is not limited to the financial industry—it’s also asking difficult questions of trustees. In their presentation Tuesday at the 58th annual Heckerling Institute on Estate Planning in Orlando, “It’s Not Easy Being Green—I ESG Investing Sustainable for Trustees,” Lauren J. Wolven, Jennifer B. Goode and Amy E. Szostak laid out just how complicated requests by beneficiaries to consider (or not consider) ESG factors in investing trust funds can make a trustee’s life when combined with the various fiduciary duties of said trustees.

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Previously, much of the analysis on these issues largely approached a trustee’s decision to invest in such strategies assuming no input from beneficiaries. However, considering use of an ESG-related strategy in response to a beneficiary’s request (aka how things would actually play out in the wild) opens the analysis up to issues regarding the beneficiary’s interest in the trust, a trust’s ability to deliver financial and direct non-financial benefits and the trustee’s fiduciary duties of loyalty, impartiality and care as they relate to a strategy’s use of ESG metrics or larger ESG-related themes.

For the purposes of this piece, we’re going to avoid getting too into the legal weeds of duties and such and just look at one of the overarching question the presenters tackled: “To what extent can a trustee allow for beneficiaries’ wishes and still retain settlor intent?”

Put simply, a trust is a relationship created by the settlor to facilitate the delivery of some asset, be it money or property, for the benefit of the beneficiaries over time. Public policy puts some restrictions of what the settlor can decree, most notably a need to balance a settlor’s property interests with the interests of those impacted by the trust, including its beneficiaries. This responsibility falls on the trustee.

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Where ESG begins to complicate things is that while the trust and its administration must benefit the beneficiaries to comply with public policy, the ultimate benefit doesn’t need to be ownership of the specific trust assets themselves. Rather, the trustee must leverage the trust property to deliver an identifiable benefit in keeping with the settlor’s intent. This can include use of trust property to provide a non-financial benefit to the beneficiaries.

In most typical cases, a trustee tasked with providing a non-financial benefit retains an asset held for non-investment purposes, even if greater purely financial benefit could be gleaned from liquidating it—think a family home or shares in a closely held family business. The emotional benefit of the item outweighs the financial. ESG-focused strategies, however, offer trustees the ability to provide the financial return of an investment strategy while potentially generating a beneficiary-specific, non-financial benefit—namely the beneficiary’s personal gratification of investing in line with one’s own values and interests. How (or even should) should a trustee weigh these sorts of non-financial interests?

Several states have authorized trustees to consider the values and beliefs of the trust’s settlor and/or beneficiaries in acting as a prudent investor. Thus, a beneficiary’s non-financial interests in trust property may impact a trustee’s investment authority. Further, the law of most states generally allows beneficiaries to influence trust administration to the extent it will not violate a trust’s “material purpose” –the underlying motivation for the trust’s creation. In absence of direction from the settlor, the trustee must engage the trustees on a case-by-case basis if the beneficiary asks for an asset to secure a non-financial benefit. Beneficiary involvement and influence is especially sticky here, as these benefits cannot be quantified on a quarterly performance report. Trustees are advised to include thorough documentation of each request, as well as their own analysis in the trust file.

Effectively, the settlor creates the skeleton of the trust relationship, but it’s up to the trustee and the beneficiaries to flesh out the rest while adhering to the settlor’s initial bone structure. Regardless of whether the benefits are financial or otherwise.


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