The UN Climate Summit held in November will likely accelerate growing interest in sustainable and responsible investing, which will put suitable asset holding structures in the spotlight, says Philip Radford, Director
Following the COP27 UN Climate Summit in Egypt, the clarion call to take urgent action to tackle the climate emergency is getting louder. As part of this, the shift to deploying wealth in line with ESG (environmental, social and governance) principles seems certain to accelerate.
Investors are already taking up the mantle: research indicates that sustainable investment funds currently manage 42% of global private capital. But the opportunity to deliver returns while contributing to climate efforts remains substantial.
For example, the World Economic Forum says the market for funding adaptation projects to protect people, property and infrastructure against the effects of climate change could be worth $2trillion annually by 2026, arguing that this is an “untapped opportunity” for the private investment community.
Preserving value and ensuring compliance
Despite growing investor appetite and an expanding opportunity set, the jury still appears to be out on whether ESG funds deliver better returns than traditional funds. As stewards of wealth tasked with preserving value for beneficiaries, trustees must always be mindful of performance and risk in their decision-making, weighing up the values of the settlor (and their family) with the ultimate objective of the structure – which is often to preserve or enhance portfolio values for beneficiaries.
This goes hand in hand with their duties around compliance, especially as regulators tighten and align rules around issues like the greenwashing of investment and other financial products.
Further to the implementation of European Sustainable Finance Disclosures Regulation (SFDR) earlier this year and the UK Financial Conduct Authority’s (FCA) ongoing consultation on a range of measures designed to crack down on greenwashing, this is a pressing issue for the industry, including for trustees administering structures holding these kinds of investments or seeking to diversify a portfolio to add resilience or transition in line with a family’s changing requirements.
Today, weighing up all these factors is a more careful balancing act than ever – particularly as the next generation, who are often more socially conscious than previous generations, have a greater say on the management and use of family wealth.
Purpose trusts in the limelight
For some wealth holders, though, simply investing more sustainably and ethically is one small step. For some ultra-high-net-worth founders, investors and their families wealth creation comes hand in hand with a wider sense of responsibility – as Patagonia founder Yvon Chouinard’s decision to effectively give away his company recently showed.
By settling his voting rights into a purpose trust – ensuring profits transfer to an environmental cause in the process – Chouinard demonstrated how families and individuals can deploy suitable structures to hold and administer assets for a specific purpose. For example, to achieve philanthropic, climate or social impact ambitions.
As with other types of trusts, choosing a well-established and well-regarded jurisdiction which best suits the settlor’s particular underlying goals is a critical consideration. The Cayman Islands, Jersey and Guernsey are among the best-known locations for establishing purpose trusts, renowned for their strong legal frameworks, recognition of trust law and robust regulatory oversight, as well as their flexible purpose trust regimes.
A Cayman STAR (Special Trusts Alternative Regime) trust, for example, has many unique benefits, such as a low administrative and reporting burden, and the potential to evolve along with the settlor’s wishes. Jersey and Guernsey are also accommodating in their rules for purpose trusts, for instance by placing very few limitations on what constitutes an acceptable purpose.
Long-term solutions
As the Patagonia example demonstrates, the trust industry can deliver real advantage to philanthropic and socially-conscious individuals and families by ensuring that their aims, values and wishes are supported over the long term. Whether the issue is helping to tackle global climate change or world poverty, or whether the remit is more localised or specific in scope such as improving social mobility or improving access to education, using a purpose trust to achieve goals, managed by an experienced trustee, can provide real benefits.
