Non-charitable discretionary trustees are increasingly taking an interest in an ESG approach to investing, which has been driven by the great wealth transfer. Younger generations are much more likely to make sustainable investing a priority and seek to make an ESG investment mandate part of the fabric of the family trust structure. Yet, despite all this, are we any closer to having real certainty on whether a trustee of a discretionary trust can truly restrict trust investments to those meeting ESG standards, without potentially being in contravention of their fiduciary duty to act in the best interest of their beneficiaries (as a whole)?

A recap of the dilemma

Trustees have a duty to act in their beneficiaries' best interests (essentially their best financial interests in the case of investment),[1] which generally requires maximising returns and diversifying investments to mitigate risk. To be clear, there is nothing preventing discretionary trustees from ESG investing and, indeed, many experts will comment that such investments have performed better than traditional investments over the past decade or so, and will continue to produce better returns in the long term. Therefore, in many cases, trustees may find that ESG investing and their fiduciary duties are neatly aligned and so it would in fact be contrary to their duties to not incorporate ESG principles into their investment decisions.