Introduction
The role of trustees in managing trust property is fundamentally tied to the fiduciary duty to act in the best interests of beneficiaries. Traditionally, this duty has been interpreted as prioritising financial returns through prudent investment decisions. However, the question of whether trustees should be permitted to consider non-financial factors—such as ethical, environmental, or social concerns—when making investment choices has gained significant traction in recent years. This essay critically discusses the statement that trustees should be able to take non-financial factors into account, exploring the legal framework governing trustee duties in the UK, the arguments for and against incorporating non-financial considerations, and the potential implications for beneficiaries and wider society. The analysis will draw on relevant legislation, case law, and academic perspectives to evaluate whether such an approach aligns with the principles of trust law or risks undermining fiduciary obligations.
The Legal Framework Governing Trustee Investment Duties
Under UK law, the duties of trustees in relation to investment decisions are primarily governed by the Trustee Act 2000. Section 4 of the Act requires trustees to have regard to ‘standard investment criteria,’ which include the suitability of investments and the need for diversification. Additionally, trustees must act with reasonable care and skill, as outlined in Section 1, reflecting their primary obligation to safeguard and grow trust assets for the benefit of beneficiaries. Historically, the courts have interpreted the duty to act in beneficiaries’ ‘best interests’ as focusing on financial outcomes, a principle reinforced in cases such as Cowan v Scargill (1985), where it was held that trustees must prioritise financial returns over personal or ethical beliefs, unless all beneficiaries consent otherwise (Megarry, 1985).
However, the legal landscape has evolved to acknowledge that non-financial factors may intersect with financial considerations. The Law Commission’s 2014 report on fiduciary duties noted that environmental, social, and governance (ESG) factors could impact long-term financial performance, suggesting that ignoring them might itself breach fiduciary duties (Law Commission, 2014). While the law does not explicitly mandate consideration of non-financial factors, there is growing recognition that such issues are not entirely divorced from financial outcomes, raising questions about the scope of trustee discretion.
Arguments in Favour of Considering Non-Financial Factors
One compelling argument for allowing trustees to consider non-financial factors is the potential alignment between ethical considerations and long-term financial stability. For instance, investments in companies with poor environmental practices may carry significant risks, such as regulatory penalties or reputational damage, which could harm financial returns over time. Academic studies, such as those by Friede et al. (2015), have demonstrated a positive correlation between ESG integration and financial performance in many cases, suggesting that non-financial factors can serve as a proxy for prudent investment strategies (Friede et al., 2015). Therefore, enabling trustees to account for such factors arguably enhances their ability to fulfil their fiduciary duty rather than detracting from it.
Furthermore, societal expectations are shifting towards greater accountability in investment practices. Beneficiaries themselves may prioritise ethical considerations, particularly younger generations who often value sustainability and social responsibility. If trustees are rigidly confined to a narrow interpretation of financial ‘best interests,’ they may fail to reflect the evolving values of those they serve. Indeed, in cases where trust deeds explicitly allow for ethical investment policies or where beneficiaries consent, there is already scope for non-financial considerations, as noted in Harries v Church Commissioners for England (1992), where the court acknowledged that charity trustees might consider ethical factors if they do not materially compromise financial returns (Donaldson, 1992). Extending this principle more broadly could ensure that trust law remains relevant and responsive to contemporary norms.
Arguments Against Considering Non-Financial Factors
On the other hand, there are significant concerns that permitting trustees to consider non-financial factors risks undermining their core fiduciary obligations. Critics argue that introducing subjective or ideological considerations into investment decisions could lead to conflicts of interest or bias, potentially prioritising a trustee’s personal beliefs over the financial welfare of beneficiaries. The landmark decision in Cowan v Scargill explicitly warned against such practices, with Sir Robert Megarry VC stating that trustees must not allow their personal views—however well-intentioned—to interfere with maximising returns (Megarry, 1985). Deviating from this principle could, therefore, expose trustees to legal liability if investments underperform due to ethical or non-financial priorities.
Moreover, there is the practical challenge of defining and measuring non-financial factors. Unlike financial metrics, which are quantifiable and subject to established benchmarks, ethical or environmental considerations are often subjective and contested. For example, one beneficiary might view investment in renewable energy as essential, while another might see it as a risky deviation from traditional sectors. This subjectivity could complicate decision-making and increase the likelihood of disputes, ultimately undermining the trust’s purpose. As Richardson (2011) argues, without clear legal or regulatory guidance, trustees may struggle to balance competing interests, potentially eroding trust in fiduciary roles (Richardson, 2011).
Balancing Fiduciary Duty and Non-Financial Considerations
A central tension in this debate is how to reconcile the traditional focus on financial returns with the growing relevance of non-financial factors. One potential solution lies in adopting a more nuanced interpretation of ‘best interests,’ recognising that financial and non-financial considerations are not always mutually exclusive. The UK Government’s 2018 guidance on pension fund investments, which encourages consideration of ESG factors where they are financially material, offers a helpful model (Department for Work and Pensions, 2018). Applying a similar principle to trusts could allow trustees to integrate non-financial factors without abandoning their duty to prioritise beneficiaries’ financial welfare.
Additionally, greater transparency and communication with beneficiaries could mitigate risks of conflict. If trustees are required to justify their consideration of non-financial factors—perhaps through regular reporting or consultation—they can demonstrate that such decisions are made responsibly and in alignment with long-term financial goals. However, implementing such mechanisms would require legislative or judicial clarification, as the current framework lacks specificity on how far trustees may deviate from purely financial considerations.
Conclusion
In conclusion, the question of whether trustees should be able to consider non-financial factors in investment decisions reflects a broader tension between evolving societal values and traditional fiduciary principles. While there is a strong case for allowing such considerations—particularly where they align with long-term financial interests or reflect beneficiaries’ values—there remain significant risks of subjectivity, conflict, and potential breaches of duty. The legal framework, as seen in cases like Cowan v Scargill, prioritises financial outcomes, but emerging perspectives, supported by academic research and policy developments, suggest that non-financial factors can be relevant to sound investment practices. Ultimately, a balanced approach, underpinned by clearer legal guidance and mechanisms for accountability, is necessary to ensure that trustees can respond to contemporary challenges without compromising their core obligations. The implications of this debate extend beyond individual trusts, influencing how fiduciary duties are understood in an era of increasing ethical awareness.
References
- Department for Work and Pensions. (2018) Pension Funds and Social Investment: Final Report. UK Government.
- Donaldson, J. (1992) Harries v Church Commissioners for England. [1992] 1 WLR 1241.
- Friede, G., Busch, T., and Bassen, A. (2015) ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies. Journal of Sustainable Finance & Investment, 5(4), pp. 210-233.
- Law Commission. (2014) Fiduciary Duties of Investment Intermediaries. Law Com No 350. London: The Stationery Office.
- Megarry, R. (1985) Cowan v Scargill. [1985] Ch 270.
- Richardson, B.J. (2011) From Fiduciary Duties to Fiduciary Relationships for Socially Responsible Investing: Responding to the Will of Beneficiaries. Journal of Sustainable Finance & Investment, 1(1), pp. 5-19.
