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SQE – Equity and Trust – Ethical Investments and Trustees’ Investment Duties
Introduction
One of the most challenging issues in modern trust law concerns the extent to which trustees may take ethical, moral, social, religious, or environmental considerations into account when making investment decisions. The question arises because trustees owe fiduciary duties to beneficiaries and must manage trust assets in their best interests. However, settlors, beneficiaries, and trustees themselves may hold strong ethical views regarding particular industries or investment activities.
Examples include investments involving:
Although the Trustee Act 2000 modernised many aspects of trustee investment powers, it did not provide a definitive answer to this issue. Consequently, the principles governing ethical investments continue to be derived primarily from case law.
The General Duty to Act in Beneficiaries’ Best Interests
The starting point is the fundamental fiduciary duty requiring trustees to act in the best interests of the beneficiaries.
Traditionally, the courts have interpreted this duty as requiring trustees to act in the beneficiaries’ best financial interests.
Trustees are therefore expected to maximise returns and preserve trust assets, subject to the standard investment criteria and the statutory duty of care.
This principle reflects the idea that trust property belongs beneficially to the beneficiaries rather than to the trustees or settlor.
Consequently, trustees cannot ordinarily pursue personal objectives at the expense of beneficiaries’ financial interests.
Financial Interests as the Primary Consideration
The traditional approach emphasises that trustees must focus on financial outcomes rather than personal beliefs.
Trustees are not free to use trust assets to advance political, moral, religious, or social causes merely because they personally support them.
Their primary obligation remains the proper management of trust assets for the benefit of beneficiaries.
This principle was clearly demonstrated in the early authorities concerning trustee investment decisions.
Buttle v Saunders
The leading authority illustrating the duty to prioritise beneficiaries’ financial interests is Buttle v Saunders [1950] 2 All ER 193.
In this case, trustees agreed orally to sell trust land to a purchaser. Before formal contracts were signed, a higher offer was received from another buyer.
The trustees believed they were morally obliged to honour the original agreement and proceeded with the sale to the first purchaser despite the lower price.
The court held that the trustees had acted improperly.
Although their conduct may have been honourable, their overriding duty was to obtain the best financial outcome for the beneficiaries.
By accepting a lower offer, they had failed to maximise the value of the trust property and were therefore in breach of trust.
Significance of Buttle v Saunders
The decision demonstrates that trustees cannot allow personal moral considerations to override their fiduciary obligations.
The beneficiaries’ financial interests must take precedence over the trustees’ personal views of fairness, honour, or morality.
The case remains an important illustration of the principle that trustees must act objectively when managing trust assets.
Cowan v Scargill
The most significant authority concerning ethical investments is Cowan v Scargill [1985] Ch 270.
The case involved the trustees of the National Coal Board pension fund.
Certain trustees, representing the National Union of Mineworkers, objected to investments in overseas energy companies and competing fuel industries. Their objections were based largely upon political and industrial considerations.
The dispute concerned whether trustees could restrict investment opportunities because of their own beliefs about the desirability of particular investments.
Decision in Cowan v Scargill
Megarry VC held that the trustees could not pursue their personal views or political preferences at the expense of the beneficiaries’ financial interests.
The court stated that trustees must put aside their own opinions and concentrate upon securing the best financial return for beneficiaries.
According to Megarry VC, the duty of trustees is generally:
“to provide the greatest financial benefits for the present and future beneficiaries.”
The trustees were therefore not entitled to exclude potentially profitable investments merely because they personally disagreed with them.
Importance of Cowan v Scargill
Cowan v Scargill established what is often regarded as the orthodox position in trust law.
The decision suggests that trustees must maximise financial returns and cannot subordinate beneficiaries’ interests to political, ethical, religious, or social objectives.
For many years, the case was viewed as imposing a strict limitation upon ethical investment policies.
Criticism of the Traditional Approach
The strict approach adopted in Cowan v Scargill attracted criticism.
Many commentators argued that the decision failed to recognise modern investment realities.
Ethical investing increasingly became accepted as a legitimate investment strategy, and many ethical funds demonstrated competitive financial performance.
The growth of environmental, social, and governance (ESG) investing further challenged the assumption that ethical considerations necessarily conflict with financial returns.
These developments prompted the courts to adopt a more flexible approach.
Harries v Church Commissioners for England
A more nuanced approach emerged in Harries v Church Commissioners for England [1992] 1 WLR 1241.
The case concerned investments held by the Church Commissioners.
The Commissioners sought to avoid investments that conflicted with the ethical teachings and mission of the Church.
The court considered whether such restrictions were compatible with trustees’ fiduciary duties.
Decision in Harries
The court recognised that ethical considerations could legitimately influence investment decisions in certain circumstances.
Nicholls V-C accepted that trustees could pursue an ethical investment policy provided that doing so did not significantly prejudice the financial interests of beneficiaries.
The court observed that trustees often have numerous investment options available and that ethical investments may be equally profitable.
Where an ethical investment strategy produces returns comparable to alternative investments, trustees are not necessarily acting in breach of duty.
The Harries Principle
The key principle emerging from Harries is that trustees may take ethical considerations into account where:
Ethical Investments and the Trustee Act 2000
The Trustee Act 2000 does not expressly regulate ethical investments.
However, paragraph 23 of the Explanatory Notes acknowledges that ethical considerations may be relevant when trustees exercise investment powers.
The legislation therefore leaves the issue to be resolved through the general principles governing trustee investment decisions.
Trustees must continue to comply with:
Role of the Settlor’s Wishes
The safest way to incorporate ethical considerations into trust investment policy is through express provisions in the trust instrument.
A settlor may direct trustees to:
Letters of Wishes
In practice, settlors frequently express ethical preferences through a letter of wishes.
Although not legally binding, a letter of wishes provides guidance to trustees regarding the settlor’s intentions.
Professional trustees will often take such guidance into account, particularly where it can be followed without compromising beneficiaries’ financial interests.
Modern ESG Investing
Modern investment practice increasingly incorporates environmental, social, and governance (ESG) considerations.
Many investors now regard ESG factors as financially relevant rather than purely ethical concerns.
Issues such as:
Consequently, consideration of ESG factors may sometimes be required as part of prudent investment management rather than being viewed as a departure from trustees’ financial duties.
Case Study
Facts
A trust fund worth £15 million is administered for several beneficiaries.
The trustees wish to avoid investments in tobacco companies because the settlor strongly opposed smoking and expressed this preference in a detailed letter of wishes.
Professional investment advice confirms that a diversified portfolio excluding tobacco investments is likely to achieve returns comparable to the broader market.
Analysis
The trustees are not sacrificing financial performance.
The investment strategy remains prudent and financially sound.
The exclusion reflects the settlor’s wishes while maintaining the beneficiaries’ financial interests.
Applying Harries, the trustees would likely be entitled to adopt the proposed ethical investment policy.
Outcome
The ethical investment strategy would probably be lawful because the beneficiaries suffer no material financial disadvantage and the investments remain suitable and diversified.
Practical Guidance for Trustees
Before adopting an ethical investment strategy, trustees should:
Conclusion
The law governing ethical investments seeks to balance trustees’ fiduciary duties with modern ethical and social concerns. The traditional position established in Buttle v Saunders and Cowan v Scargill emphasised that trustees must prioritise beneficiaries’ financial interests and cannot pursue personal moral or political objectives at the expense of investment returns. However, Harries v Church Commissioners introduced a more flexible approach, recognising that ethical investment policies may be legitimate where they remain financially sound and do not significantly disadvantage beneficiaries. While the Trustee Act 2000 does not expressly resolve the issue, modern trust practice increasingly accepts ethical and ESG considerations as part of prudent investment management. Nevertheless, trustees must always ensure that their primary duty to act in the best interests of beneficiaries remains paramount.
References
Buttle v Saunders [1950] 2 All ER 193.
Cowan v Scargill [1985] Ch 270.
Harries v Church Commissioners for England [1992] 1 WLR 1241.
Trustee Act 2000, ss 1, 4 and 5.
Trustee Act 2000, Explanatory Notes, para 23.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
Introduction
One of the most challenging issues in modern trust law concerns the extent to which trustees may take ethical, moral, social, religious, or environmental considerations into account when making investment decisions. The question arises because trustees owe fiduciary duties to beneficiaries and must manage trust assets in their best interests. However, settlors, beneficiaries, and trustees themselves may hold strong ethical views regarding particular industries or investment activities.
Examples include investments involving:
- tobacco companies;
- arms manufacturers;
- gambling businesses;
- fossil fuel industries;
- alcohol production;
- environmentally harmful activities.
Although the Trustee Act 2000 modernised many aspects of trustee investment powers, it did not provide a definitive answer to this issue. Consequently, the principles governing ethical investments continue to be derived primarily from case law.
The General Duty to Act in Beneficiaries’ Best Interests
The starting point is the fundamental fiduciary duty requiring trustees to act in the best interests of the beneficiaries.
Traditionally, the courts have interpreted this duty as requiring trustees to act in the beneficiaries’ best financial interests.
Trustees are therefore expected to maximise returns and preserve trust assets, subject to the standard investment criteria and the statutory duty of care.
This principle reflects the idea that trust property belongs beneficially to the beneficiaries rather than to the trustees or settlor.
Consequently, trustees cannot ordinarily pursue personal objectives at the expense of beneficiaries’ financial interests.
Financial Interests as the Primary Consideration
The traditional approach emphasises that trustees must focus on financial outcomes rather than personal beliefs.
Trustees are not free to use trust assets to advance political, moral, religious, or social causes merely because they personally support them.
Their primary obligation remains the proper management of trust assets for the benefit of beneficiaries.
This principle was clearly demonstrated in the early authorities concerning trustee investment decisions.
Buttle v Saunders
The leading authority illustrating the duty to prioritise beneficiaries’ financial interests is Buttle v Saunders [1950] 2 All ER 193.
In this case, trustees agreed orally to sell trust land to a purchaser. Before formal contracts were signed, a higher offer was received from another buyer.
The trustees believed they were morally obliged to honour the original agreement and proceeded with the sale to the first purchaser despite the lower price.
The court held that the trustees had acted improperly.
Although their conduct may have been honourable, their overriding duty was to obtain the best financial outcome for the beneficiaries.
By accepting a lower offer, they had failed to maximise the value of the trust property and were therefore in breach of trust.
Significance of Buttle v Saunders
The decision demonstrates that trustees cannot allow personal moral considerations to override their fiduciary obligations.
The beneficiaries’ financial interests must take precedence over the trustees’ personal views of fairness, honour, or morality.
The case remains an important illustration of the principle that trustees must act objectively when managing trust assets.
Cowan v Scargill
The most significant authority concerning ethical investments is Cowan v Scargill [1985] Ch 270.
The case involved the trustees of the National Coal Board pension fund.
Certain trustees, representing the National Union of Mineworkers, objected to investments in overseas energy companies and competing fuel industries. Their objections were based largely upon political and industrial considerations.
The dispute concerned whether trustees could restrict investment opportunities because of their own beliefs about the desirability of particular investments.
Decision in Cowan v Scargill
Megarry VC held that the trustees could not pursue their personal views or political preferences at the expense of the beneficiaries’ financial interests.
The court stated that trustees must put aside their own opinions and concentrate upon securing the best financial return for beneficiaries.
According to Megarry VC, the duty of trustees is generally:
“to provide the greatest financial benefits for the present and future beneficiaries.”
The trustees were therefore not entitled to exclude potentially profitable investments merely because they personally disagreed with them.
Importance of Cowan v Scargill
Cowan v Scargill established what is often regarded as the orthodox position in trust law.
The decision suggests that trustees must maximise financial returns and cannot subordinate beneficiaries’ interests to political, ethical, religious, or social objectives.
For many years, the case was viewed as imposing a strict limitation upon ethical investment policies.
Criticism of the Traditional Approach
The strict approach adopted in Cowan v Scargill attracted criticism.
Many commentators argued that the decision failed to recognise modern investment realities.
Ethical investing increasingly became accepted as a legitimate investment strategy, and many ethical funds demonstrated competitive financial performance.
The growth of environmental, social, and governance (ESG) investing further challenged the assumption that ethical considerations necessarily conflict with financial returns.
These developments prompted the courts to adopt a more flexible approach.
Harries v Church Commissioners for England
A more nuanced approach emerged in Harries v Church Commissioners for England [1992] 1 WLR 1241.
The case concerned investments held by the Church Commissioners.
The Commissioners sought to avoid investments that conflicted with the ethical teachings and mission of the Church.
The court considered whether such restrictions were compatible with trustees’ fiduciary duties.
Decision in Harries
The court recognised that ethical considerations could legitimately influence investment decisions in certain circumstances.
Nicholls V-C accepted that trustees could pursue an ethical investment policy provided that doing so did not significantly prejudice the financial interests of beneficiaries.
The court observed that trustees often have numerous investment options available and that ethical investments may be equally profitable.
Where an ethical investment strategy produces returns comparable to alternative investments, trustees are not necessarily acting in breach of duty.
The Harries Principle
The key principle emerging from Harries is that trustees may take ethical considerations into account where:
- The investment remains financially sound.
- Beneficiaries do not suffer significant financial disadvantage.
- The ethical policy is consistent with the purposes of the trust.
Ethical Investments and the Trustee Act 2000
The Trustee Act 2000 does not expressly regulate ethical investments.
However, paragraph 23 of the Explanatory Notes acknowledges that ethical considerations may be relevant when trustees exercise investment powers.
The legislation therefore leaves the issue to be resolved through the general principles governing trustee investment decisions.
Trustees must continue to comply with:
- the statutory duty of care (s 1);
- the standard investment criteria (s 4);
- the duty to obtain proper advice (s 5);
- their fiduciary duty to act in beneficiaries’ best interests.
Role of the Settlor’s Wishes
The safest way to incorporate ethical considerations into trust investment policy is through express provisions in the trust instrument.
A settlor may direct trustees to:
- avoid particular industries;
- retain certain investments;
- pursue socially responsible investments;
- follow religious investment principles.
Letters of Wishes
In practice, settlors frequently express ethical preferences through a letter of wishes.
Although not legally binding, a letter of wishes provides guidance to trustees regarding the settlor’s intentions.
Professional trustees will often take such guidance into account, particularly where it can be followed without compromising beneficiaries’ financial interests.
Modern ESG Investing
Modern investment practice increasingly incorporates environmental, social, and governance (ESG) considerations.
Many investors now regard ESG factors as financially relevant rather than purely ethical concerns.
Issues such as:
- climate change risks;
- corporate governance failures;
- labour practices;
- sustainability concerns;
Consequently, consideration of ESG factors may sometimes be required as part of prudent investment management rather than being viewed as a departure from trustees’ financial duties.
Case Study
Facts
A trust fund worth £15 million is administered for several beneficiaries.
The trustees wish to avoid investments in tobacco companies because the settlor strongly opposed smoking and expressed this preference in a detailed letter of wishes.
Professional investment advice confirms that a diversified portfolio excluding tobacco investments is likely to achieve returns comparable to the broader market.
Analysis
The trustees are not sacrificing financial performance.
The investment strategy remains prudent and financially sound.
The exclusion reflects the settlor’s wishes while maintaining the beneficiaries’ financial interests.
Applying Harries, the trustees would likely be entitled to adopt the proposed ethical investment policy.
Outcome
The ethical investment strategy would probably be lawful because the beneficiaries suffer no material financial disadvantage and the investments remain suitable and diversified.
Practical Guidance for Trustees
Before adopting an ethical investment strategy, trustees should:
- obtain professional investment advice;
- consider the standard investment criteria;
- assess potential financial consequences;
- review the trust deed;
- consider any letter of wishes;
- document their decision-making process carefully.
Conclusion
The law governing ethical investments seeks to balance trustees’ fiduciary duties with modern ethical and social concerns. The traditional position established in Buttle v Saunders and Cowan v Scargill emphasised that trustees must prioritise beneficiaries’ financial interests and cannot pursue personal moral or political objectives at the expense of investment returns. However, Harries v Church Commissioners introduced a more flexible approach, recognising that ethical investment policies may be legitimate where they remain financially sound and do not significantly disadvantage beneficiaries. While the Trustee Act 2000 does not expressly resolve the issue, modern trust practice increasingly accepts ethical and ESG considerations as part of prudent investment management. Nevertheless, trustees must always ensure that their primary duty to act in the best interests of beneficiaries remains paramount.
References
Buttle v Saunders [1950] 2 All ER 193.
Cowan v Scargill [1985] Ch 270.
Harries v Church Commissioners for England [1992] 1 WLR 1241.
Trustee Act 2000, ss 1, 4 and 5.
Trustee Act 2000, Explanatory Notes, para 23.
Law Commission, Trustee Powers and Duties (Law Com No 260, 1999).
Alastair Hudson, Equity and Trusts (11th edn, Routledge 2022).
James Penner, The Law of Trusts (12th edn, Oxford University Press 2020).
Graham Virgo, The Principles of Equity and Trusts (5th edn, Oxford University Press 2024).
John McGhee (ed), Snell’s Equity (35th edn, Sweet & Maxwell 2024).
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