Lost in a moral maze
Putting together a trust investment policy statement should be a straightforward job – after all, the trust document sets out the objectives, the beneficiaries and other relevant details. Indeed, sometimes the job really is that easy. On occasions, however, it turns out to be what my late father-in-law called a ‘five-minute job’: a task that should be quick and easy, but takes a strangely long time to complete.
Part of the problem can be the timescales that we expect the investment policy statement to cover, i.e. the duration of the trust.
When advising a private individual on investments, you consider the long term, but build in flexibility for the individual to change direction or objectives as and when needed. While the individual may have an investment objective of preserving their wealth for the next generation, they do not expect their funds outside of trusts and business ventures to carry on in the same format after their death.
In contrast, the trust or trusts set-up will quite often have a number of phases with different requirements – for example, growth during the settlor’s lifetime, changing on their death to an income need, and then possibly changing back again on the death of a specific beneficiary. Hence, we try to write the investment policy statement with as much flexibility as possible, while also meeting the settlor’s wishes.
Regrettably, once the statement has been written and put in place, it does not follow that matters are straightforward from then on. Questions can quite often arise from trustees concerning the direction and types of investments for the trust, especially following the death of the settlor. For example, while the investment policy statement may be silent on the question of ethical investments, because the settlor held no strong views on the subject, the remaining or new trustees may hold strong views. After all, s3(1) Trustee Act 2000 does say ‘a trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust’.
Previously, when trustees looked at ethical investing, terms were used such as ‘dark green’ and ‘light green’, the former comprising stricter criteria, under which companies were invested in if they had a positive impact on the environment, and the latter representing a wider mandate, whereby companies were avoided if they had a negative impact on the environment.
Now the term ‘mid-green’ quite often appears. It may seem that the choice of three shades of green is not too confusing for the investor. But we also have to consider ‘socially responsible investment’, ‘environmental, social and governance’ issues, ‘social, environmental and ethical’ issues, and ‘sustainable and responsible investment’.
What if, for example, clients wish the portfolio to be invested in accordance with their Christian beliefs? In order to try to ascertain what they would consider acceptable and unacceptable investments, it may be a good idea to attempt to complete an ethical screening questionnaire with them – ‘attempt’ being the operative word, as a number of questions will prove problematic. For example, the clients may be opposed to armaments generally, but nevertheless have regretted the loss of jobs at BAE Systems in Portsmouth. Advising a discretionary fund manager based on this remit would not really clarify the boundaries.
This point is further illustrated in the following scenario. An IT expert runs his own consultancy firm, advising some of the biggest companies in the UK. The expert also lectures at a London university. One of the first questions he likes to ask new students is: what was the main source of funding for the early development of the internet? The students tend to answer ‘banking’ or ‘the military’, but the expert tells them it was instead ‘entertainment’ or, more specifically, ‘pornography’. Would, then, any internet company be an acceptable investment for trustees who do not wish to invest in companies linked to pornography?
Whether setting out a new investment policy statement or attempting to interpret an existing one for new or existing trustees, we can only do our best and remember what the trustees can legally do or not do, and what the fundamental objectives of the trust are.
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