November 29, 2021
Whether you are establishing a trust (by will or while alive), are a beneficiary, or are a trustee, one of the issues of concern might be the trustee’s duty to invest. What investments are allowed? In particular, what if you, whether settlor, trustee or beneficiary, holds strong views either way about so-called “ethical investing”?
Generally, trustees have an obligation or duty to invest, with a standard of “ordinary prudence”. In Ontario, this is codified in the Trustee Act section 27, which authorizes a trustee to invest “in any form of property in which a prudent investor might invest”. The Act goes on to set out some mandatory criteria for a trustee to consider:
- General economic conditions.
- The possible effect of inflation or deflation.
- The expected tax consequences of investment decisions or strategies.
- The role that each investment or course of action plays within the overall trust portfolio.
- The expected total return from income and the appreciation of capital.
- Needs for liquidity, regularity of income and preservation or appreciation of capital.
- An asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.
You may notice that all but one of these items relate to the return on the investment.
This reflects the traditional view of the law that the duty of the trustee is to maximize the return on investment.
Where the purpose of the trust is other than maximum return, item 7 recognizes that exceptions may be made.
In addition, a further provision of the Act allows a trustee to diversify to the extent that is appropriate to the requirements of the trust.
So, if you are the settlor and wish your trust to achieve an “ethical” or “socially responsible” purpose, such as not investing in countries or industries notorious for human rights or environmental violations, it is important to carefully set out those desires not merely as wishes, but as purposes or requirements of the trust.
But what if you are the trustee or a beneficiary of a trust that is not clear about this requirement?
Unfortunately, the law is less than clear about these situations. The general view is that the trustee may follow ethical investing principles if in doing so they can justify it under the prudent investor standard – for example, that the risks of “unethical” investing are too great, or the need for diversification.
Each situation is very much fact specific.
This is not a perfect solution, as illustrated by an English case where the trustees of the Church of England sought direction from the court as to whether or not they could limit investments to those they felt are consistent with promoting the Christian faith. This happened when South Africa still practiced apartheid, so they limited investments in companies active in that country. The court refused to give directions, on the basis that the requested directions where both ambiguous and unnecessary, pointing out that the objects of the trust already obliged the trustees to have regard to the object of promoting the Christian faith. Although this gave the trustees some comfort, it did not give them clear direction.
The best solution to the ethical investing dilemma is still careful drafting and direction to the trustee in the establishing document, be it a will or a declaration of trust. Absent that, trustees may wish to obtain legal advice on the limitations, and in cases worth the cost, seek the direction of the court on their situation. All of these are yet more reasons why trusts should seldom be a “do it yourself” exercise, and the wisest investment a settlor or trustee can make is sound legal help.