ESG Investing for Trusts: Aligning Values with Fiduciary Duty

Sustainable and socially responsible investing has exploded in popularity. Younger generations often want their investments to reflect their values and positively impact society. Trustees are feeling the pressure to incorporate environmental, social and governance (ESG) factors into trust portfolios. Yet doing so raises questions: How far can a trustee go without breaching fiduciary duty? What language must a trust contain to allow ESG investing? And how should trustees balance returns with beneficiaries’ values? This post examines the evolving role of ESG investing in trusts and offers guidance for trustees.

The Rise of ESG and Its Appeal to Beneficiaries

At the Heckerling Institute’s 2024 estate planning conference, attorneys noted a global trend toward sustainable investment strategies. This shift is driven largely by younger beneficiaries who want trust assets allocated to companies with strong environmental practices, fair labor policies and transparent governance. Purpose‑driven investing can foster family harmony by aligning the trust’s investments with beneficiaries’ ideals. However, ESG investing isn’t just for millennials; many investors believe that companies focusing on sustainability may also be better positioned for long‑term success.

ESG investing presents both opportunities and challenges. On the upside, it can identify companies that manage risk well, reduce exposure to industries facing regulatory headwinds, and even deliver competitive returns. On the downside, there is no universal definition of ESG, making it difficult to compare funds or strategies. Implementing ESG screens can be complex, may reduce diversification, and can lead to lower returns compared with broad market indexes. Beneficiaries may also disagree about which ESG criteria matter most. One beneficiary may prioritize climate change, while another cares more about corporate diversity.

Fiduciary Duties: Care, Loyalty and Prudent Investing

Trustees have two primary fiduciary duties when managing trust investments: the duty of care and the duty of loyalty. The duty of care requires trustees to make informed investment decisions with the same caution a prudent investor would exercise. In the ESG context, this means thoroughly researching factors such as a company’s carbon footprint, labor practices and board structure and evaluating their impact on risk and return. The duty of loyalty mandates that trustees act solely in the beneficiaries’ best interests. Trustees cannot impose their personal beliefs or societal pressures on the portfolio if doing so jeopardizes returns.

Legal uncertainty adds complexity. There is no standardized framework for what constitutes an “ESG‑compliant” investment. As a result, trustees face potential challenges from beneficiaries who disagree with the chosen ESG criteria or who believe the trustee’s actions violated fiduciary duties. Courts may interpret ESG mandates differently across jurisdictions. To mitigate this risk, trustees need clear trust language and robust documentation.

Updating Trust Documents to Permit ESG Investing

Traditional trust instruments often direct trustees to maximize returns without mention of social or environmental considerations. To incorporate ESG investing, consider amending or restating the trust to include:

• Purpose or mission statements.  A family values statement or mission clause can articulate shared priorities such as sustainability, diversity or community impact. This gives trustees a blueprint for aligning investments with beneficiaries’ values.

• Permissive language.  Explicitly authorize the trustee to consider ESG factors when selecting investments. Clarify that this authority complements—not replaces—the prudent investor rule. For instance, the document might say, “The trustee may consider environmental, social and governance factors in addition to financial metrics when making investment decisions.”

• Delegation provisions.  Allow the trustee to hire investment advisors or managers with ESG expertise. Modern statutes like the Uniform Directed Trust Act permit settlors to appoint an investment director separate from the administrative trustee. This structure enables a sustainability expert to handle the portfolio while leaving administration to a corporate trustee.

• Limits and priorities.  Describe the level of priority ESG considerations should have relative to financial return. Some trusts specify that ESG goals are secondary to ensuring adequate income for beneficiaries; others permit a modest reduction in returns to achieve impact.

Once the trust instrument reflects ESG goals, trustees can more confidently pursue socially responsible strategies without fearing breach of duty claims.

Balancing Values and Returns: Practical Strategies

Even with permissive language, trustees must diligently manage risk and maintain diversification. Consider the following approaches:

1. Integrate ESG into Traditional Analysis.  Rather than excluding entire industries, many sustainable investing strategies evaluate companies within each sector and overweight those with strong ESG scores. This approach maintains sector diversification while tilting toward better performers.

2. Use ESG ETFs and Mutual Funds.  Exchange‑traded funds and mutual funds focused on ESG criteria provide diversified exposure and professional management. Compare their methodologies, fees and performance. Look for funds that disclose how they score companies and whether they engage in shareholder advocacy.

3. Incorporate Shareholder Engagement.  Trustees can hold shares in companies they want to influence and then vote proxies to encourage improved practices. Some ESG strategies include active ownership, using a seat at the table to push for better governance or environmental stewardship.

4. Educate Beneficiaries.  Host meetings or send communications explaining the ESG strategy, the expected risk/return profile and how it aligns with the trust’s purpose. Encourage beneficiaries to ask questions. Clear communication reduces the likelihood of misunderstandings and disputes.

5. Document Every Decision.  Trustees should keep a record of research, advisor recommendations and rationale for each ESG investment. Documentation demonstrates that the trustee considered both financial and ESG factors and acted prudently. If beneficiaries challenge the strategy, these records show adherence to fiduciary duties.

Case Study: Aligning a Family Trust with Climate Goals

The Green Family established a multi‑million‑dollar trust decades ago. The oldest generation was comfortable investing in blue‑chip stocks and bonds. Their grandchildren, however, want to reduce the trust’s carbon footprint. They propose divesting from fossil fuel companies and investing in renewable energy. Before making changes, the trustee reviews the trust document and sees that it emphasizes maximizing returns. He convenes a family meeting to discuss values and goals. After hearing from all beneficiaries, he works with counsel to amend the trust to include a mission statement authorizing the incorporation of ESG factors. He appoints an independent investment advisor with expertise in sustainable finance. The trust gradually reallocates 20 percent of its portfolio into ESG funds while maintaining diversified exposure to other sectors. The trustee documents these changes and sends regular updates to beneficiaries. By combining clear legal authority, professional advice and transparent communication, the Green Family’s trust successfully aligns investments with values while fulfilling fiduciary duties.

Conclusion: Responsible Stewardship in a Values‑Driven World

ESG investing isn’t just a passing fad—it reflects a broader desire to use wealth responsibly. Trustees can accommodate this desire if they act prudently and communicate effectively.

Start by clarifying the trust’s purpose and updating documents to authorize ESG considerations, then conduct thorough research, engage experienced advisors and keep beneficiaries informed. By balancing values with returns, trustees can help create a legacy that reflects both the settlor’s intentions and the beneficiaries’ aspirations. Sustainable investing may enhance family harmony, but it must be handled with the same care and diligence as any other fiduciary decision.