Our synopsis: a three-step framework

'Where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes, the trustees have a discretion as to whether to exclude such investments and they should exercise that discretion by reasonably balancing all relevant factors' Judgement extract, Butler-Sloss

The Butler-Sloss case in the UK recently clarified that investment policies can and (some would suggest) should be aligned with (in this case) charitable purpose. The Judge explicitly ruled that the proper exercise of fiduciary duty in the charitable trust case can in certain circumstances be at the expense of financial return (subject to full prior consideration being applied by the Trustees). That is the 'purpose' of a (charitable) trust overides the return maximisation principle. A trust can be set up with any investment goal. There is plenty of case law and experience to demonstrate how trust articles can be written or varied to accommodate specific investment objectives. Both Guernsey and Jersey Finance have published papes explaining how trusts can be constituted to direct investments to a specific goal or type. So if the Settlor of a trust wishes to ensure their capital is deployed for a particular purpose – for example one specific SDG there is a clear roadmap. With clear objectives and governance established at the outset, it should be a straightforward task for fiduciaries to ensure investments are aligned with any specfic sustainability objectives of a trust. The next stage is integrating these objectives into an investment policy framework. This should be more reassuring to trustees worried that they possess themselves little experience or expertise in the sustainable finance field. As we previously outlined whereas economically targeted investing can be viewed as is investing with the aim to provide financial as well as collateral, non-financial, benefits and this is not the same as incorporation of ESG issues into investment management procesess.

In 2021, Guernsey Finance published a report which set out five factors holding back local adoption 21st Century Fiduciary Duty.

• Limited clarity on trust can be structured to explicitly enable the trustee to pursue a sustainable investment strategy. • A limited understanding about what sustainable investment is and whether financial return must be sacrificed for sustainable credentials. • What best practice measures a trustee should take to ensure the set up and ongoing monitoring of a high-quality sustainable investment strategy • How trustees should report the nonfinancial elements of the investment strategy. • Limited local codes and guidance on responsible investment.

This paper is in direct response to this last factor but the first two above betray a lack of confidence of those spoken to. Once again, we see the conflation of the lack of return issue and sustainability. We have clearly outlined (as did the UN in some depth in 2019) that returns are not necessarily negatively impacted by 'sustainable investment strategies' . What is true is that is a sustainable investment purpose, over and above the core fiduciary duty of capital preservation, for instance climate change mitigation, is something that requires discussion and incorporation into trust documentation. Something that is best done on inception. We believe that concerns expressed about inabilities to measure and report nonfinancial elements is a red herring and is in many respects fuelled by the confusion and complexity sown by the 'white noise' of marketing communications.

A sustainable investment strategy is one where returns are sustainable long term once ESG type risks have been taken into consideration. And at the general level, reporting of investment performance remains a matter for the investment manager.

Measurement of non-financial benefits, in line with any purpose set out in trust deeds, need not be a complicated exercise but may require expertise hitherto previous not employed.

When everything is said and done the stumbling block is the residual concern that future beneficiaries may seek to challenge the 'purpose' of the trust, if not clearly defined and expressed, as a proxy for general claims for compensation for poor returns.

And it is this one issue that is the bottleneck in our opinion. Dialogue and advisory on this point is a higher level conversation for fiduciaries. Establishment of appropriate trust documentation is a fairly surmountable exercise, but it is one within the mandate of the trusted advisor.

This should not and does not preclude fiduciaries first moving forward on the climate and ESG aspects of sustainability and this is the rationale behind the threestep, three level, three stages of the framework we outline in this report. We see the development of sustainable finance practices as a journey.