ESG stands for Environmental, Social and Governance which are the three essential factors used in measuring the sustainability of an investment. In other words, ESG helps assess which businesses are viable long-term without causing harm to people or the planet. You may also have heard of ethical investing, responsible investing, impact investing and/or socially responsible investing but they are often all referring to the same concept.
The public’s interest in corporate sustainability gained momentum in 1983 thanks to the United Nation’s Brundtland Commission. In their report, Our Common Future, the Commission called for development that ‘meets the needs of the present without compromising the ability of future generations to meet their own needs’. Since then, studies have emerged such as the 2005 landmark report, Who Cares Wins by Ivo Knoepfel, with the aim of illustrating how integrating ESG into capital markets makes good business sense.
Take, for example, companies involved in oil spillage, deforestation, mining and pollution. These are all things that can cause damage not only to the environment but also to a company’s value, share price and long-term survival. The ESG factors prompt investors to consider the impact this could have on the company’s future financial performance. Other considerations could include the company’s response to climate change, health and safety, waste management, the exploitation of natural resources, working conditions and so on.
In the context of private client law, this topic is particularly relevant to trustees who may wish, or even be obliged, to consider ESG investments when exercising their powers to invest trust funds. As trustees must act in the best interests of their beneficiaries, they should be aware of the potential links between financial growth and ESG investing. Trustees could consider incorporating sustainability into their investment decision making process, as long as this is permitted by the trust deed and the standard investment criteria set out in section 4 of the Trustee Act 2000. Even if a trustee is not obliged to act in accordance with section 4, they must only disregard its provisions if they can demonstrate a good cause to do so. Otherwise, they may face personal liability by failing to discharge their investment responsibilities correctly.
However, as you may have realised by now, this is all fairly complex and I would strongly advise any trustee who is considering exercising their investment powers to seek both legal and financial advice, especially before considering ESG investing. Like all investments, they inevitably carry some degree of risk.
If you are a trustee and have any queries in respect of the issues raised in this blog, please do not hesitate to contact any member of our Wealth Management and Taxation Team for further advice.