DEAR TRUST OFFICER: What is this “impact” investing I’ve been hearing about? Can trust assets be invested for social impact?
— SEEKING SOCIAL JUSTICE
DEAR SEEKING SOCIAL JUSTICE:
There is no simple definition of “impact” investing. One writer called it “a movement that aims to force social change by minimizing or eliminating investors’ exposure to companies that harm the world,” while still achieving a solid return. Putting a more positive spin on the idea, another writer suggested “a movement that aims to maximize investors’ exposure to companies that improve the world.”
This approach can include negative screens—avoiding tobacco and liquor companies, say—or positive screens—looking for companies that have women in leadership positions, or strong environmental records, for example.
Trust assets are invested according to guidelines provided in the trust instrument. The grantor of the trust is free to impose any desired restrictions on the buying and selling of holdings for the trust. However, in most cases the grantor plans to rely on the investment expertise of the trustee, rather than put handcuffs on the decision.
If the trust does not provide specific guidance for investment decisions, might the trustee take the initiative? When this question came up in the 1990s, when the concept of “socially responsible investing” was popularized, the initial answer was no. A trustee who invests for any purpose other than risk-appropriate return on assets would, it was thought, be violating a fiduciary duty to the trust beneficiaries. In part, this observation may have been influenced by the fact that some socially responsible strategies were seen as significantly underperforming the market.
Proponents of “impact” investing have argued that their more sophisticated approach may prove less risky than the market as a whole, without sacrificing returns. Time will tell.
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