What should those who hold and run trusts think about climate change and the consequences that are said to come from it? A senior figure from offshore law firm Ogier, in Jersey, considers the terrain.
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.
In this article, Henry Wickham, counsel at Ogier in Jersey, suggests how trustees should think about global warming, and what they can and should do about it.
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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.
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.