Building Tomorrow’s Legacy: How ESG Trusts Bridge Personal Values and Investment Strategy

As the largest intergenerational wealth transfer in history unfolds, an estimated $84 trillion in assets will pass to Millennials and members of Generation X from the Silent Generation and Baby Boomers through inheritance or gifting between 2023 and 2045. This unprecedented transfer coincides with a fundamental shift in investment philosophy, as there is a growing trend, particularly among Millennials and the members of Generation Z, of incorporating environmental, social and governance (“ESG”) considerations into their personal investment portfolios.

Understanding ESG Trusts: Where Values Meet Legacy

Environmental, social, and governance (ESG) is shorthand for an investing principle that prioritizes environmental issues, social issues, and corporate governance. When applied to trust structures, ESG investing allows families to use their financial resources to influence positive change in society by supporting companies which focus their business practices and core values on being the change.

ESG trusts represent a sophisticated estate planning tool that enables families to express their family values not just through distribution standards or charitable donations, but through the investment strategy of family trusts. Focusing on a company’s environmental, social and governance impact on the world, families are attempting to align the trust investments with their personal values through the inclusion of specific language within their trust instruments expressly requesting that the trustees focus investment strategies on sustainable investments.

The Three Pillars of ESG Trust Investing

ESG trusts evaluate investments across three critical dimensions:

• Environmental Impact: Environmental impact looks at a company’s carbon footprint, its work in mitigating the emission of toxic chemicals in manufacturing, and its on-going pursuit of sustainable and eco-friendly supply chains
• Social Responsibility: The investment is reviewed for the positive social impact the company is making both internally and in the surrounding community. Social change factors typically can include initiatives like LGBTQ+ engagement, racial diversity at all levels of the company, and inclusive hiring practices. It is a review of the company’s advocacy for social good not only from within, but also in the world around it
• Corporate Governance: This examines a company’s leadership, executive pay, audits, internal controls, and shareholder rights

Navigating Fiduciary Duties in ESG Trust Planning

One of the most significant challenges in implementing ESG trusts involves balancing personal values with fiduciary responsibilities. Trustees must adhere to the standards of fiduciary duty, which includes the duties of care, loyalty, and impartiality, when they make investment decisions for the trust.

The key to successful ESG trust implementation lies in proper documentation. Due to the potential implications of ESG investing for trustees, it is best to include clear language in trust documents that allow for ESG investing if the settlor desires such investments with clear parameters. This will allow trustees to invest the trust assets with consideration for the beneficiaries’ values and interests, even if this investing is at the expense of long-term investment returns, without fear of breaching the trustee’s fiduciary duties.

The Growing Financial Case for ESG Investing

Contrary to historical concerns about financial performance, recent data suggests ESG investments can deliver competitive returns. As recently as December of 2023 some companies with strong ESG scores have been found to consistently outperform the S&P 500 Index over the past few years according to Forbes Magazine. Additionally, by 2023, the ESG movement had grown from a UN corporate social responsibility initiative into a global phenomenon representing more than US$30 trillion in assets under management.

The investment landscape continues to evolve, with at least European ESG outperformance being the real deal. That steadiness gives trustees a strong platform for including at least some ethical investments in a trust portfolio which is focussed on security as well as growth.

Implementing ESG Trusts: Practical Considerations

For families considering ESG trusts, the implementation process requires careful planning and expert guidance. For new trusts, the path forward is simple, it is including specific language in your trust instrument either allowing or directing the fiduciary charged with investment discretion to focus investment strategies on ESG investments. This language can be broad, or very specific if the family values are focused on a particular area.

A crucial component of successful ESG trust implementation is developing a family values statement. A family values statement is a written expression of a family’s sustainability objectives, grounded in their consensus values. Articulating it creates a vision for the family’s shared future.

The Role of Professional Guidance

Given the complexity of balancing fiduciary duties with ESG objectives, working with an experienced trust lawyer is essential. Legal professionals can help draft appropriate trust language, ensure compliance with fiduciary requirements, and create structures that honor family values while protecting beneficiaries’ interests.

Fratello Law, with offices in Smithtown and Syosset, New York, understands that every client is unique and we take the time to understand our clients’ individual needs. At Fratello Law, we love building lasting relationships with clients that span generations. This personalized approach is particularly valuable when crafting ESG trusts that must balance multiple generations’ values and financial objectives.

Looking Ahead: The Future of Values-Based Estate Planning

ESG trusts represent more than just an investment strategy—they embody a fundamental shift toward purpose-driven wealth transfer. For trusts – and there are many – with investment horizons of 30 years or longer a focus on sustainable investments could well insulate trustees against changes of fashion in the financial markets.

As families navigate this evolving landscape, the importance of proper legal guidance cannot be overstated. The implications of ESG investing for trustees necessitate clear trust documents that allow for ESG-focused investing to align with beneficiaries’ values and interests, potentially enhancing family harmony at the expense of long-term investment returns.

ESG trusts offer families an unprecedented opportunity to align their financial legacy with their deepest values, creating a bridge between today’s intentions and tomorrow’s impact. By working with experienced legal professionals who understand both the technical requirements and the personal motivations behind these structures, families can create trusts that not only preserve wealth but also promote positive change for generations to come.