Impact Investing: Considerations for Trustees
Impact investing seeks to integrate values, such as those related to environmental, social, governance, and/or faith-based themes, with investment decisions. As more and more investors look to implement impact investment strategies, interesting questions are raised in the context of impact investing by fiduciaries appointed to administer a trust for beneficiaries. Suppose the beneficiary of a multi-generational, non-charitable, trust is interested in integrating her values in a trust established for her benefit. How should a trustee determine if the request is consistent with the trustee’s duties under the Prudent Investor Rule?
The desire to integrate values and investment decisions is not a new phenomenon and, in fact, has existed for centuries. Today, the impact investing landscape has transformed from a single lens—an example is divestment—to a broad range of impact investing options. Two common Glenmede techniques for integrating ESG factors include “ESG Tilt,” which overweights stocks with high ESG scores, and “ESG Momentum,” which overweights companies with improving ESG scores and underweights companies with deteriorating ratings.
The Prudent Investor Rule
The Prudent Investor Rule, which sets the rules that a trustee must follow in investing trust assets, provides that “[a] trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.” This general rule is supplemented by more specific factors that a trustee must consider in making investment decisions, as well as more specific duties that the trustee must carry out, such as the duty to diversify. It is worth highlighting that the text of the Prudent Investor Rule does not directly address the permissibility of impact investing by a trustee of a non-charitable trust, though there is a reference to “social investing” in a comment to the Uniform Act, as will be noted below.
The Duty of Loyalty
Discussions on impact investing by trustees focus heavily on the duty of loyalty. The duty of loyalty provision of the Uniform Prudent Investor Act states that “[a] trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.” A comment to the Uniform Prudent Investor Act notes that “[n]o form of ‘social investing’ is consistent with the duty of loyalty if the investment activity entails sacrificing the interests of trust beneficiaries-for example, by accepting below-market returns-in favor of the interests of the persons supposedly benefitted by pursuing the particular social cause.”
Some commentators distinguish what they refer to as “risk-return” investing and “collateral benefits” investing.1 They argue that ESG investing is permissible if 1) the fiduciary believes in good faith that the ESG investment program will benefit the beneficiary directly by improving risk-adjusted returns, and 2) the fiduciary’s exclusive motive for adopting the ESG investment program is to obtain this direct benefit.2 Collateral benefits ESG investing “entails consideration of interests other than the sole interest of the beneficiary” and is “generally not consistent with fiduciary duty".3
One state has modified its law to address this issue; in 2018, Delaware incorporated the concept of impact investing into its statute governing trusts. In time, other states may adjust their laws as well.
Returning to our initial question, “How might a trustee of a multi-generational non-charitable trust proceed with a request by a current beneficiary to implement an impact investment program?” The first place to look is the governing instrument for the trust. It may be possible for a settlor to include language in a trust instrument explicitly permitting or directing the trustee to pursue such investment strategies.
Where the trust instrument is silent, there is support for the position that “risk-return” investing, as described above, is permissible under trust law. Other alternatives may be available depending on the terms of the trust and the applicable state law. As interest in impact investing by grantors and beneficiaries of non-charitable trusts grows, it seems likely that the law in this area will continue to develop.
You may also be interested in: Impact Investing Under the Uniform Prudent Investor Act
1 Max M. Schanzenbach & Robert H. Sitkoff, “The Law and Economics of Environmental, Social, and Governance Investing By a Fiduciary,” Discussion Paper No. 971, Harvard Law School (2018).
2 See id.
3 See id.
This material is intended to be a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and it is not personalized investment, estate planning, tax or legal advice. Advice is provided in light of a client’s applicable circumstances and may differ substantially from this presentation. This material may contain Glenmede’s opinions, which may change without notice after date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. This publication may not be used as legal or tax advice.