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Trusts and Sustainable Investing: Building the Bridge

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Family values statements can be beneficial tools for incorporating sustainable investing strategies into personal trusts.

Sustainable investing is here to stay — but personal trusts have been slow to embrace it. U.S. sustainable investing assets reached $8.4 trillion at the beginning of 2022,1 as many investors seek to express ESG (environmental, social and governance) considerations in their portfolios and align their investments with their values.

One category of investors, however, remains largely on the sidelines: trustees of personal trusts. Despite growing numbers of states passing modern trust laws that permit trustees to consider sustainable investing factors, many trustees may still presume that sustainable investing is inconsistent with their fiduciary duties.

Northern Trust Wealth Management increasingly supports sustainably inclined trust clients as they navigate this dilemma. For grantors, the solution is relatively straightforward: They can draft provisions into their trusts that expressly allow sustainable investments. For beneficiaries of trusts lacking this language, family values statements provide a promising path forward.

A family values statement is a written expression of a family’s sustainability objectives, grounded in their consensus values. Articulating it creates a vision for the family’s shared future. In addition, the family values statement can help bridge preferences for sustainable investment and the trustee’s fiduciary duties.

Bridging Sustainable Investing with Fiduciary Duties

Family values statements have become a best practice among multigenerational families establishing trusts. They identify strengths that have contributed to past successes, express a consensus view on how to apply them in the present, and project those strengths into a shared future, helping provide the family with unity and common purpose.

Note that fiduciaries must adhere to three specific duties: duty of prudence, duty of loyalty and duty of impartiality. For each, family values statements can help accommodate sustainable investing preferences. Below, we provide background on using this powerful tool — in combination with a prudent investment process — as the key to potentially unlocking the sustainable investing door for trusts.

Duty of Prudence

Trustees are required to invest trust assets prudently. They must carefully document due diligence in investment selection and ongoing monitoring, and take performance, risk-return characteristics and fees into account. A family values statement informs the trustees of the beneficiaries’ sustainability objectives so that they can take them into account when selecting among prudent assets.

Trustees and their advisors historically have been concerned that sustainable investments suffer from inferior performance relative to traditional investment strategies, rendering them imprudent. But the sustainable investing universe has changed immensely in recent years and now includes a wide variety of strategies, including low-cost passive approaches. Sustainable investments no longer are perceived to conclusively underperform conventional strategies — in fact, Northern Trust research has found that sustainable investing does not have a meaningful impact on performance, either positively or negatively. However, as with all investments, the universe of sustainable investments includes a wide disparity in net-of-fee performance potential, making robust due diligence critical.

Duty of Loyalty

A trustee’s duty of loyalty requires the trustee to use and invest the trust funds solely for the benefit of trust beneficiaries. Because sustainable investments seek a positive outcome extending beyond trust beneficiaries, some argue that they create an impermissible benefit to non-beneficiaries.

In reality, every investment affects non-beneficiaries, and choosing to invest in one company over another has ramifications for all of said company’s stakeholders, not just the investor. A family values statement can articulate a family’s intention to take ESG considerations into account in its investments, thereby aligning these potential secondary investment benefits with its values.

Duty of Impartiality

The duty of impartiality requires trustees to be concurrently loyal to all trust beneficiaries, including those not yet born. Historically, trustees’ concern has been that investing in sustainable investments based on the preferences of some beneficiaries may conflict with a trustee’s duty to serve the other beneficiaries whose preferences may differ.

Family values statements help overcome this issue by requiring consensus across all adult beneficiaries and integrating new perspectives of younger generations as they come of age. These statements evolve over time, receiving continual updates to ensure that they remain relevant across multiple generations.

Family Values Statement

The example below shows how ESG investing can help multi-generational families express family values within their portfolios.

Our family believes that everyone has a right to clean air and water. As such, we are committed to climate-aware investments that seek to promote better ecological practices around the globe. We therefore ask that our investment team use ESG factors in their due diligence, asset selection and monitoring process to identify investments making a positive environmental impact. As a family, we are committed to reassessing this statement periodically to ensure its continued relevance.

Next Steps for Grantors, Beneficiaries and Trustees

If you are a grantor, beneficiary or trustee of a personal trust, you can take concrete actions to incorporate sustainable investing.

Grantors

For grantors, the path toward allowing your trust to invest in sustainable strategies is relatively straightforward. Work with your advisors to draft trust provisions that expressly allow sustainable investing and consider supplementing them with a statement of wealth transfer intent.

Beneficiaries and Trustees

If you are the beneficiary of a trust and want to incorporate sustainable investing, we suggest discussing the following with your trustee and other advisors:

A family values statement. Maintaining a shared vision for a family’s collective future is a hallmark of successful multigenerational wealth families. This process enables you to build an enduring family culture that benefits current and future beneficiaries alike. Determine if your family has consensus on sustainable investment objectives that you could incorporate into a family values statement. At Northern Trust, we have a process to help families develop and maintain these multigenerational statements. This process allows both the family and trustee to monitor and adjust sustainable investments as needed to ensure that they continue to meet your family’s evolving objectives. (Read more about transferring values along with wealth.)

Skilled investment screening. Work with an investment advisor who has the right expertise to successfully identify and monitor strategies that meet your sustainability objectives while satisfying prudent investment standards. At Northern Trust, we have a rigorous process for vetting investment products, including sustainable strategies. It includes developing a deep understanding of each strategy’s risk exposures and assessing expected returns after taxes, fees and inflation.

Sustainable investing can help families coalesce around a shared vision for their wealth and the impact they make with it.2 If you want your trust to employ sustainable investment approaches, talk with your financial advisor about how you might begin this process using a family values statement.

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1. US SIF Foundation 2022 Report on US Sustainable Investing Trends

2. “Sustainable Investing: A Trustee’s Friend or Foe?” Stan Treger and Amy Szostak, Investment & Wealth Monitor, November/December 2022.

Disclosures

This document is a general communication being provided for informational and educational purposes only and is not meant to be taken as investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions or inflation. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Northern Trust and its affiliates may have positions in, and may effect transactions in, the markets, contracts and related investments described herein, which positions and transactions may be in addition to, or different from, those taken in connection with the investments described herein.

LEGAL, INVESTMENT AND TAX NOTICE. This information is not intended to be and should not be treated as legal, investment, accounting or tax advice.

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Periods greater than one year are annualized except where indicated. Returns of the indexes also do not typically reflect the deduction of investment management fees, trading costs or other expenses. It is not possible to invest directly in an index. Indexes are the property of their respective owners, all rights reserved.

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