Guess who wins: Socially responsible investments meet fiduciary duties

“Socially Responsible Investing” (SRI) is all the rage in investment circles. So is its big sister: “Environmental, Social and Governance Investing” (ESG).

Both are strategies promoting investment decisions that focus on, or at least factor in, a company’s claim that it is bringing about social change. The company is betting shareholders’ money that the public posturing will attract investors and raise stock prices.

For some investors, SRI and ESG strategies are the closest they will ever come to believing they are effectuating a real change to … something. This belief persists even though it may be impossible to verify a company’s claim.

The popularity of SRI and ESG has spawned numerous funds and strategies. It is investment marketing on steroids. SRI and ESG are so popular that some estimate more than $17 trillion in assets under management are invested based on socially responsible criteria.

There is nothing the matter with that, of course. Unless, that is, you are a trustee investing trust assets, in which case your social investing may lead you to a breach of fiduciary duty lawsuit and personal liability for damages.

Oops.

A trustee has a duty to invest and manage the trust assets solely in the interest of the beneficiaries. It is called the duty of loyalty.

The trustee’s duty of loyalty is found in the statutes of almost every state. The Uniform Prudent Investor Act, which has been adopted in some form by 44 states, specifically requires a duty of loyalty by trustees. The Texas version is found in Chapter 117 of the Texas Property Code.

Every trustee in Texas is bound by the Uniform Prudent Investor Act. Its requirements can be varied by specific terms of the trust, but most trusts use the act as the basis for trustee investment decisions.

Under the duty of loyalty, the trustee must act exclusively for the beneficiaries. The trustee cannot act for its own best interests or for the best interests of a third party. This is especially true for a trustee’s investment decisions.

It is here where socially responsible investing falls into disrepute. If a trustee places a high value on social investing, then it may accept below-market returns to achieve its strategy. By doing that, it is placing the interest of the persons who supposedly benefit from those social causes above the interests of the trust beneficiaries.

It is a classic trade-off. It is also against the law.

Many investment companies, eager to persuade trustees to invest with them, will blather about how a particular investment plan can achieve high returns in both investments and social causes. Sometimes they may even be right.

However, even including a company’s advertised social responsibility as a factor in making an investment could be a violation of a trustee’s duty of loyalty. A trustee cannot offload its duty to a third-party investment company, however well- intentioned the decision.

If you are setting up a trust and want to have the trustee engage in SRI and ESG, then spell it out in the trust document. Be specific about the causes you want the investments to promote. Give alternatives if those causes are found to be illegal or companies cease to support them. Include language that specifically releases the trustee from liability for making those investments.

If you are a trustee, then read the trust and read your state’s version of the Uniform Prudent Investor Act. Never make a trust investment decision based upon your personal beliefs or pet causes.

Virginia Hammerle is in her fourth decade of practicing law. She is board-certified in civil trial law by the Texas Board of Legal Specialization and an accredited estate planner. Contact her at legaltalktexas@hammerle.com or visit www.hammerle.com. This column does not constitute legal advice.