Introduction.
‘Trust’ refers to the relationship created, intervivos or on death, by a person, the settler when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose. A trustee is in a fiduciary relationship with the beneficiaries of a trust. In essence, the trustee holds the legal title but is compelled by equity to hold the property for the benefit of others.
The present essay will discuss the general principles governing trustees and their role in the administration of the trust. In doing this, we will seek to find out the extent to which trustees can take into account ethical and/or political views whilst making investment decisions. The present stance of the law will also be analyzed. The remainder of the essay will be organized in the following way: the second section will be a discussion on the general principles governing trustees in ethical investment decisions and the third section will be the conclusion.
General Principles Governing Trustees and their Duties in the Investment of the Trust.
Basically, trustees are required to invest the trust res in accordance with the express intent of the settlor or testator.[1] In such a situation, trustees are required to act as would a reasonable or ordinary prudent man in making his investment decisions and his failure to act as such may render him liable to the trusts beneficiaries.[2]Case law and statutory law have provided guidelines within which trustees must act in order to satisfy this standard of reasonableness and avoid the possibility of a breach of trust. Thus, included in this standard of reasonableness is a duty to administer the trust as they find it, as deviation may amount to an actionable breach of trust. In the case of Chapman v Chapman[3], Lord Morton stated categorically that, “the settlor’s intention is not capable of being violated…” This suggests that trustees have a duty to invest but a power over what to invest in.
This power to invest is governed by statutory default provisions (previously Trustee Investment Act 1961 now Trustee Act 2000). The Trustee Investment Act 1961 was applied in so far as it was not excluded by trust and a wider range of investments was accorded to trustees governed by certain criteria and trustees were permitted to invest as if absolute owners . The Trustee Act 2000 now governs trustees’ powers of investment and applies to all trusts whether created before or after it comes into force.
The question that arises at this point is what does “invest” mean? This was answered by the court in Re Wragge[4] to mean “to apply money in the purchase of some property from which interest or profit is expected and which property is purchased in order to be held for the sake of the income it will yield”. Megarry V C in Cowan v Scargill[5]stated, “the prospect of the yield of income and of capital appreciation both have to be considered in judging the return from investment”. In essence, trustees are expected to invest in a way that will produce an income or capital return.
The issue of whether trustees can take their own ethical or political views into consideration whilst making investment decisions was considered in the Cowan Case. This case suggests that trustees are not permitted to subordinate considerations of financial return to non-financial criteria whether ethical or political.[6]The judge stated that the interest of beneficiaries is paramount in trust investments. He reasoned that the best interest of the beneficiaries would normally be their financial interests.[7] This case can be criticized on the basis that the question of whether taking into account ethical considerations to improve return on investment did not actually arise in the case. What the case does exclude is the personal interests and views of the trustees which cannot be justified on broad economic grounds.[8] It is to be noted that beneficiaries can hold conflicting views as to what amount to an ethical investment. This is why the courts are reluctant in allowing trustees to make investment decisions based on their own ethical considerations. For instance, while disagreements will most likely permeate traditional ethical or religious issues, such as alcohol or gambling, substantial agreement in other areas may readily arise.
This was contrasted in the case of Harries v The Church Commissioner for England,[9] it was decided that trustees can make investments guided by their own ethical considerations once it is shown that overall financial performance will not be affected and also if the investment would be consistent with the purpose of the trust.
Consequently, with regards to investment decisions based on the ethical or political views of the settlor, the position of the law is that where there is express authorization from the settlor, trustees have a duty to adhere to the authorized investment clauses. This is to prevent liability on the part of the trustees. Thus, where a settlor wants their ethical views taken into consideration, the investment clause must give the trustees specific authority. This was the position of the court in the case of Nestle v National Westminster Bank[10] where it was held that merely because the trustees had not invested the trust funds in a different manner, they were not ipso facto personally liable to the claimant as he had failed to prove a causal link between the performance of the fund and an alleged loss.
However, in a charitable trust, trustees are generally restrained from taking into consideration ethical views of the beneficiaries if the investment will conflict with the object of the trust or alienate potential donors. Thus, in the case of Bishop of Oxford v England Church Commissioners,[11]the court found that trustees can only take into consideration the ethical views of the beneficiaries of a trust only to the extent that it does not significantly jeopardize financial returns. Trustees will be exempted from this duty to maximize financial returns where the aims of the charity and the objects of the trust conflict and if the ethical or political views deviates from the charity’s work. In essence, for trustees to take the ethical or political views of the beneficiaries of a trust into consideration, they must weigh the extent of financial loss from offended supporters and the financial risk of exclusion.[12]
The present stance of the law is that trustee investment should be characterized by some degree of prudence whilst taking into consideration the financial returns to the beneficiaries. Even if the trustees’ investment is based on ethical considerations, they will still be liable for any loss where the investment does not yield the income expected. Realistically, it might be difficult for the law to deviate from its present stance because the law seeks to protect beneficiaries from the unwise decisions of trustees and also to protect trustees from liability for loss.
CONCLUSION
It can be seen from the preceding discussion that there is a correlation between fiduciary investment standards and trusts. Arguably, market forces rather than law pose the greatest hindrance to trustees in taking into consideration their ethical and/or political views whilst making trust investments.
Regulation to encourage ethical investment could enable institutional investors, even without explicit mandate by the trust to lawfully take social and ethical factors into account if such factors will have a material bearing on financial returns and risks.
Even though ethically motivated investing is seen as sacrificing financial returns, it is suggested that policy makers could insist that trustees take social and environmental impact into account as part of their duties and this could encourage the courts to change their stance. This is because if it is correctly formulated and applied, trustee investments based on ethics should aid rather than hinder financial benefit.
Citations
[1]Austin, W.S;(1917) The Nature of the Rights of the “Cestui Que Trust”. Available at www.http://jstor.org/stable/1112528. Accessed 05/07/2013
[2]Austin W.S; (1936) The Trustees Duty of Loyalty. Available at www.http://jstor.org/stable/1332851. Accessed 06/07/2013.
[3]Chapman v Chapman (1954) AC 429, 451
[4] Re Wragge (1919) 2 CH 58
[5]Cowan v scargill (1985)CH 270.
[6]Edwards & Stockwell (2011) Trusts and Equity 10thedition, London:Pearson.
[7]Cowan Pg 127.
[8] Watt, G., (2012) Trusts & Equity. 5th edition, Oxford:OUP.
[9]Harries v The Church Commissioner for England (1993) 2 ALL ER 300.
[10]Nestle v Westminster Bank plc (1993) 1 WLR 1260.
[11] Bishop of Oxford v England Church Commissioners (1993) 2 ALL ER 300.
Benjamin, R; (2005) Do the Fiduciary Duties of Pension Funds Hinder Socially Responsible Investment? Available at www.http://ssrn.com/abstract=970236. Accessed 5/72013.
Edwards & Stockwell (2011) Trusts and Equity 10th edition, London:Pearson.
Hanbury & Martin (2012) Modern Equity 19th edition, London: Sweet and Maxwell.
Haley& McMurtry (2011) Equity & Trusts 3rd edition, London: Sweet & Maxwell.
Palmer, P; et al, (2005) Socially Responsible Investment. A guide for Pension Schemes and Charities. London: Haven Publications.
Watt (2012) Trusts & equity 5th edition; Oxford:OUP
