Investing in the future: climate change and fiduciary duty
What it means to act in the ‘best interests’ of a trust’s beneficiaries has long been a thorny question for trustees and lawyers advising them. Should a trustee simply try to maximise financial returns, or should they consider whether their investments could improve their beneficiaries’ lives? With the recent increased focus on climate change and other ‘ESG’ issues, the extent to which trustees can consider these issues in meeting their duties is a topic of much discussion.
Trustees’ fiduciary duty requires them to act in accordance with the proper purpose of the trust in the best interests of the beneficiaries of that trust. The starting point is the purpose of the trust – what does the trust deed say? This fundamental question informs what the best interests of the beneficiaries are likely to be – Merchant Navy Ratings Pension Trustees Ltd v Stena Line Ltd  EWHC 448 (Ch).
Trusts — in particular charitable trusts — may also have different purposes which afford different degrees of discretion to trustees. In Butler-Sloss & Ors v The Charity Commission for England And Wales & Anor  EWHC 974 (Ch), a charitable trust was allowed to adopt an investment strategy which excluded investments in companies which were deemed to be incompatible with the greenhouse gas emission reduction goals of the Paris Agreement. The court held that the trustees had reasonably balanced the likelihood and seriousness of the potential conflict of the investments with the purpose of the trust, and the likelihood and seriousness of any potential financial effect from the exclusion of such investments.
Absent any specific purpose, the proper purpose of a trust is likely to be “to secure the best realistic return over the long term, given the need to control for risks”, according to the Law Commission’s 2014 consultation on fiduciary duty.
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Going beyond this, what do trustees need to consider to ensure that they are acting in the best interests of their beneficiaries? The Law Commission has stated that financial factors may always be taken into account, and must be taken into account where they are financially material.
Non-financial factors — like improving beneficiaries’ quality of life, showing disapproval of unethical business and so on — may be taken into account where trustees have a good reason to think that beneficiaries would share that concern; and where the decision does not involve a risk of significant financial detriment to the fund. This test has been referred to with approval by the Supreme Court – R (Palestinian Solidarity Campaign Ltd and anor) v Secretary of State for Housing, Communities and Local Government  1 WLR 1774.
So where issues such as climate change are considered to be non-financial, trustees can integrate them in their decision-making if they apply this test. However climate risks are increasingly being recognised as financial factors – and potentially as material financial factors.
The Bank of England’s Prudential Regulatory Authority and the Financial Conduct Authority are collaborating as the Climate Risk Financial Forum, and have produced a tool allowing firms to assess their exposure to climate change risks and the materiality of these risks to their portfolios. The UK Government and the Financial Conduct Authority have introduced regulations requiring companies to disclose the climate-related risks facing their business models, as well as their methods for identifying, managing and mitigating those risks. On a global level, analysis by Swiss Re. has found that a global average temperature increase of 2 degrees will lead to a 11% decrease in global GDP; scientific predictions on climate change predict an increase of 2-4 degrees, and potentially as high as 5 degrees, by the end of the century.
So, as the impacts of climate change materialise, trustees should expect to see them impact on portfolios. Trustees should be therefore thinking about whether climate change impacts are likely to pose a material financial risk to their portfolio, and so whether they should consider these risks in order to meet their fiduciary duty.
Fiduciary duty can be a complex concept. In its 2023 Green Finance Strategy, the UK Government acknowledged that “decisions around investing and systemic risks are complicated and that trustees would like further information and clarity on their fiduciary duty in the context of the transition to net zero.” However, trustees should be clear that if they consider climate risks to be financially material, they should be integrating them into their investment decisions in order to protect the portfolios they manage, and protect their beneficiaries from risk.
This article has been prepared by the Commonwealth Climate and Law Initiative (CCLI). The CCLI is a UK-incorporated charitable company founded by the University of Oxford, ClientEarth and Accounting for Sustainability. The CCLI examines the legal basis for directors and trustees to consider, manage, and report on climate change and broader environmental risks, opportunities and impacts, and the circumstances in which there may be liability for failing to do so.
This article is provided for educational purposes only and is not, and is not intended to be, legal advice. The CCLI, its founders, and partner organisations make no representations and provide no warranties in relation to any aspect of this document, including regarding the advisability of investing in any particular company or investment fund or other vehicle. The CCLI shall not be liable for any claims or losses of any nature in connection with information contained in this article, including but not limited to, lost profits or punitive or consequential damages. While efforts have been made to ensure that this document is accurate and free from errors and omissions, this document should not be, and is not intended to be, relied upon for any purposes and readers are advised to conduct their own research and analysis and obtain their own legal advice.
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