Socially Responsible Investing: What Every Trustee Should Know

Earlier this year, one of my clients came to me with a question about her family’s trust portfolio. She was worried that, despite it going against her own personal social values, she (along with the rest of her family) was investing in cigarette companies. “Do we really have to invest this money in cigarette companies?” she asked me. “I mean, there have got to be more socially responsible investments than that.”

The question raised some important issues that trustees might face when it comes to the trend more commonly known as socially responsible investing. And while it might seem like avoiding investments into, say, a cigarette company would not be such a big deal, when a trust is involved it’s actually a bit more complicated than it initially appears.

First, a bit of background: Socially responsible investing describes an investment approach that take into account the social or environmental impact of the company’s goods and services and may include aspects of job creation in the local economy and the makeup of a company’s workforce with regard to its ethnicity and/or gender. Impact investing, a term coined by the Rockefeller Foundation’s Bellagio Center in 2007, is a branch of socially responsible investing that encompasses making investment with the intention of generating positive environmental or social impacts, as well as financial returns.

However, socially responsible investing by trustees raises important questions that need to be considered with respect to the trustee's duty of loyalty, duty of impartiality, and duty to invest prudently.

Here are three important points to consider should a trustee or beneficiary express interest in pursuing socially responsible or impact investment strategies:

• Trustees need to be particularly careful that they don’t impose their own views of what is socially viable onto the beneficiaries. A trustee must act in the interest of the beneficiary, and when the trustee imposes its own views instead of the beneficiaries’ views, the trustee has a conflict of interest. So even in cases where all of the beneficiaries of a trust have decided they would like to follow a socially responsible investment policy, the resulting investments should always reflect the social views of the beneficiaries—not the trustee.
• Trustees need to remember that not all beneficiaries have the same views on social issues. Trustees have a duty to be impartial and to act in the best interest of all beneficiaries—even if some of those beneficiaries may be bothered by certain types of investments. Trustees who acquiesce to the demands of some beneficiaries to use a socially responsible investment philosophy risk charges of favoring these beneficiaries over the interests or social views of others. Trustees need to make sure they are acting equitably with respect to all beneficiaries and are not satisfying the desires of one beneficiary at the expense of the others.
• Finally, trustees must not lose sight of their duty to invest prudently. Generally speaking, a trustee must invest as a prudent investor would, taking into account the purposes, terms, distribution requirement, and other circumstances of the trust and acting with reasonable care, skill and caution toward the investment portfolio as a whole. So while a trustee may have some wiggle room in terms of avoiding investments in certain companies—be it tobacco companies, GMO producers, etc.—trustees must always be sensitive to their duty to act prudently and in the best interest of all of the beneficiaries and build a diverse portfolio. Although a trustee likely can invest in a manner that satisfies the needs of the beneficiaries while still avoiding certain companies that some beneficiaries find offensive, at the end of the day, the trustee cannot throw sound investment strategies and attentiveness to the needs of current and future beneficiaries by the wayside in an effort to satisfy just one or some of the beneficiaries—unless, of course, the trust itself gives latitude to do so.

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Mark K. Harder is a partner with the law firm of Warner Norcross & Judd LLP and serves as Chair of the firm’s Family Office Group. He concentrates his practice in estate planning and administration for high net worth individuals and in the representation of family owned businesses and their owners.

Mr. Harder is a Fellow in the American College of Trust & Estate Counsel and is listed in Best Lawyers in America and Michigan Superlawyers. He was named 2010 Lawyer of the Year for Trusts and Estates in Grand Rapids, Michigan by Best Lawyers in America and was recognized as a 2010 Thought Leader in the Law by the West Michigan Business Review.
He served as Chair of the State Bar of Michigan’s Probate and Estate Planning Section and was the Chairman and Reporter for the Michigan Trust Code Committee. He also is the co-author of Estates and Protected Individuals Code with Reporters’ Commentary published by the Institute for Continuing Legal Education and is an active speaker for the Institute of Continuing Legal Education and other professional organizations.