All About Estates

Can a Prudent Investor have a Green Thumb?

This blog was written by Raluca Gondor

You’re named executor of a green estate. You’ve arranged for a green burial in one of Ontario’s seven green cemeteries, have identified environmental charities in line with the testator’s wishes, and are now left to handle the estate’s investments. You’ve just arrived at this clause in the testator’s will:

“My Trustees may make any investments that my Trustees in their discretion consider advisable, so long that they are aligned with my environmental, social, and governance (ESG) values.”

Now what?

Creating a legacy plan takes estate planning further by incorporating your values and intentions into your plan. If you are passionate about ESG factors while alive, then why should your estate be any different? When drafting their will, a client can specify their desired ESG considerations, impact, and how they would be implemented. But how can an executor fulfill these wishes, without neglecting their other duties?

Responsible investing (RI) encompasses a variety of strategies that consider environmental, social, and governance factors in investing. In recent years, RI has gained significant traction, with a growing number of individual and institutional investors recognizing its financial and social value. As an executor, by ignoring ESG factors when administering a green estate, you would be going against the testator’s wishes. Who says you can’t be sustainable even from beyond the green grave?

Fiduciary Duty

Regulators worldwide have begun giving the green light to fiduciaries to partake in ESG investing. The Canadian Expert Panel on Sustainable Finance’s final report included a recommendation to “[clarify] the scope of fiduciary duty in the context of climate change.” For instance, since January 2016, Ontario pension funds are required to clearly disclose “whether [ESG] factors are incorporated into the plan’s investment policies” in addition to financial factors.

Can ESG Investing Satisfy the Prudent Investor Rule?

The prudent investor rule states that an executor should act with due care, skill, and diligence when investing for an estate, as an “ordinary prudent person” would. Numerous studies have shown the value of ESG investing in terms of risk management and financial performance. This is especially true with companies that have good governance practices, since they are less likely to be involved in scandals that negatively impact shareholder value.

Duty of Loyalty … to the Environment?

The duty of loyalty means that fiduciaries should act in the interests of all beneficiaries. One study argues that ESG investing is acceptable if the fiduciary believes such investments will benefit the beneficiaries and that their sole reason in doing so is to achieve this benefit. Risk-return ESG can therefore be consistent with fiduciary duty. The United Nations Environment Program Finance Initiative’s report takes this further by arguing that fiduciaries need to “understand and incorporate beneficiaries’ … sustainability-related preferences, regardless of whether [they] are financially material”.

Beneficiaries that are Green … with Envy?

RI is often perceived as being inferior to traditional investing, with concerns around portfolio diversification and sacrificing financial returns. While many studies have shown that this is not the case, beneficiaries may nonetheless be concerned that these investments are incompatible with the financial returns they believe they are entitled to. As such, it is important to be transparent with them and set expectations early on. If an estate is to be administered with ESG as the priority, the will should make this very clear.

If you suspect that the beneficiaries may be unsatisfied with the estate’s ESG investments, you could seek an ESG indemnity to avoid liability if the returns aren’t in line with traditional investments.

Duty of Even-Handedness

It is important to ensure that no one beneficiary or group of beneficiaries is favoured over another. While ESG investments tend to outperform longer term, this may not align with trusts that have a short-term time horizon. As a result, the income and capital beneficiaries could have different goals, making it even more important to carefully consider the portfolio’s investments.

Kermit the Frog once said, “it’s not easy being green” and estates are no exception. But if you consider all these factors, you will be well on your way to successfully administering a green estate!

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