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DISCLOSURE STATEMENT
No potential conflict of interest was reported by the author(s).
Notes
1 United Nations, Transforming our world: the 2030 Agenda for Sustainable Development (2015) <https://documents-dds-ny.un.org/doc/UNDOC/GEN/N15/291/89/PDF/N1529189.pdf?OpenElement> accessed 20 January 2024.
2 United Nations, The Sustainable Development Goals Report 2023: Special Edition (2023), 2 <https://unstats.un.org/sdgs/files/report/2023/secretary-general-sdg-report-2023--EN.pdf> accessed 20 January 2024.
3 United Nations, UN Global Compact Strategy: 2021–2023 (2021), 7 <https://ungc-communications-assets.s3.amazonaws.com/docs/about_the_gc/UN-GLOBAL-COMPACT-STRATEGY-2021-2023.pdf> accessed 20 January 2024.
4 Intergovernmental Panel on Climate Change, Global Warming of 1.5°C (2019), 154 <https://www.ipcc.ch/site/assets/uploads/sites/2/2022/06/SR15_Full_Report_HR.pdf> accessed 20 January 2024.
5 Addisu Lashitew, ‘Corporate Uptake of the Sustainable Development Goals: Mere Greenwashing or an Advent of Institutional Change?’ (2021) 4 J Intl Business Policy 184.
6 Evidence has shown that reputation is a major driver of ESG integration: BNP Paribas, The ESG Global Survey 2021 (2021), 25–27 <https://securities.cib.bnpparibas/app/uploads/sites/3/2021/09/the-esg-global-survey-2021.pdf> accessed 20 January 2024. Universities, for example, have increasingly been pressured to divest their fossil fuel holdings: see Naomi Oreskes and Sofia Andrade, ‘Harvard and Other Schools Make a Choice on Fossil Fuels’ (New York Times, 2 October 2021) <https://www.nytimes.com/2021/10/02/opinion/divestment-fossil-fuels-harvard.html> accessed 20 January 2024; Susan Svrluga, ‘Student Climate Activists from Yale, Stanford, Princeton, MIT and Vanderbilt File Legal Complaints to Compel Divestment’ (Washington Post, 16 February 2022) <https://www.washingtonpost.com/education/2022/02/16/college-fossil-fuel-divest-legal-action/> accessed 20 January 2024.
7 [1985] Ch 270.
8 The Global Compact, Who Cares Wins: Connecting Financial Markets to a Changing World (2004), i <https://www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.pdf> accessed 20 January 2024.
9 David Uberti, ‘ESG’s Long History: 1700s to Today’ (Wall Street Journal, 19 August 2023) <https://www.wsj.com/story/esgs-long-history-1700s-to-today-5ce73439> accessed 20 January 2024.
10 Julie L Holcomb, Moral Commerce: Quakers and the Transatlantic Boycott of the Slave Labor Economy (Cornell University Press 2016).
11 This formed the backdrop of the dispute in Martin v City of Edinburgh District Council (1988) SLT 329. See generally Vincent Harris, ‘Divestment Hits Apartheid in the Pocketbook’ (1985) 16 J Black Studies & Research 12.
12 See, for example, Betty Moy Huber, Michael Comstock and Hilary Smith, ‘UN Sustainable Development Goals—The Leading ESG Framework for Large Companies’ (Harvard Law School Forum on Corporate Governance, 14 October 2018) <https://corpgov.law.harvard.edu/2018/10/04/un-sustainable-development-goals-the-leading-esg-framework-for-large-companies/> accessed 20 January 2024.
13 Some of the major rating firms are Morgan Stanley Capital International (MSCI), Morningstar, Thomson Reuters, S&P Global and Bloomberg.
14 Leslie Norton, ‘This is Why Tesla’s ESG Rating Isn’t Great’ (Morningstar, 22 May 2022) <https://www.morningstar.co.uk/uk/news/221629/this-is-why-teslas-esg-rating-isnt-great.aspx> accessed 20 January 2024.
15 See the influential ‘Freshfields Report’ commissioned by the United Nations Environment Programme Finance Initiative: Freshfields Bruckhaus Deringer, A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment (2005), 25 <https://www.unepfi.org/fileadmin/documents/freshfields_legal_resp_20051123.pdf> accessed 20 January 2024; OECD, ESG Investing: Practices, Progress and Challenges (2020), 32–34 <https://www.oecd.org/finance/ESG-Investing-Practices-Progress-Challenges.pdf> accessed 20 January 2024. See also Suzanne McGee, ‘ESG Investors Face a Choice: Do You Use a Positive or Negative Screen?’ (Wall Street Journal, 1 November 2022) <https://www.wsj.com/articles/esg-investing-companies-screening-11667226822> accessed 20 January 2024.
16 Benjamin Richardson, ‘Fossil Fuels Divestment: Is It Lawful?’ (2016) 39 UNSWLJ 1686, 1696. Increasingly more universities are making a commitment to divest from fossil fuel holdings to enhance their pro-environmental reputation: see Gregory M Mikkelson, Miron Avidan, Aleksandra Conevska and Dror Etzion, ‘Mutual Reinforcement of Academic Reputation and Fossil Fuel Divestment’ (2021) 4 Global Sustainability e20, 4.
17 See Part 3 below.
18 OECD (n 15), 36–58.
19 Freshfields Report (n 15), 27–29.
20 Sanjai Bhagat, ‘An Inconvenient Truth About ESG Investing’ (Harvard Business Review, 31 March 2022) <https://hbr.org/2022/03/an-inconvenient-truth-about-esg-investing> accessed 20 January 2024; Mike Edleson and Andy Puzder, ‘Is ESG Profitable? The Numbers Don’t Lie’ (Wall Street Journal, 10 March 2023) <https://www.wsj.com/articles/is-esg-profitable-the-numbers-dont-lie-benchmarks-analytics-politics-neutral-fiduciary-duty-market-woke-5da4a533> accessed 20 January 2024.
21 Pieter Jan Trinks and Bert Scholtens, ‘The Opportunity Cost of Negative Screening in Socially Responsible Investing’ (2017) 140 J Business Ethics 193.
22 Paul Polman and Andrew Winston, ‘Yes, Investing in ESG Pays Off’ (Harvard Business Review, 13 April 2022) <https://hbr.org/2022/04/yes-investing-in-esg-pays-off> accessed 20 January 2024.
23 BNP Paribas (n 6), 15.
24 See, for example, Gunnar Friede, Timo Busch and Alexander Bassen, ‘ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies’ (2015) 5 J Sustainable Finance & Investment 210; Sakis Kotsantonis, Chris Pinney and George Serafeim, ‘ESG Integration in Investment Management: Myths and Realities’ (2016) 28 J Applied Corporate Finance 10.
25 Max Schanzenbach and Robert Sitkoff, ‘Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee’ (2020) 72 Stanford L Rev 381, 433–34; Susie Daykin, ‘Pension Scheme Investment: Is it Always Just About the Money? To What Extent Can or Should Trustees Take Account of Ethical or ESG Factors When Investing?’ (2014) 28 TLI 165, 166.
26 Benjamin Richardson, ‘Socially Responsible Investing for Sustainability: Overcoming Its Incomplete and Conflicting Rationales’ (2013) 2 Transnational Environmental L 311, 328.
27 Schanzenbach and Sitkoff (n 25), 435; Daykin (n 25), 166; Paul Watchman, Jane Anstee-Wedderburn and Lucas Shipway, ‘Fiduciary Duties in the 21st Century: a UK Perspective’ (2005) 19 TLI 127, 140.
28 Schanzenbach and Sitkoff (n 25), 435–36.
29 OECD (n 15), 31.
30 Luke Broadway, ‘Butler-Sloss v The Charity Commission: ESG Investment Guidance in Need of Elaboration’ (2022) 28 T&T 849, 853-854.
31 Another category, which we do not cover, relates to divestment of fossil fuel holdings by universities. This is a special category because universities do not necessarily hold their funds on trust but also because they are often creatures of statutes and royal charters. See generally Richardson (n 16); Benjamin Richardson, ‘Universities Unloading on Fossil Fuels: The Legality of Divesting’ (2016) Carbon & Climate L Rev 62.
32 As the Law Commission observed, ‘[t]here is … a growing recognition that pension trusts are ‘different’, and that they may merit separate consideration’: Law Commission, ‘Fiduciary Duties of Investment Intermediaries’ (2014) (Law Com No 350) (‘LC 350’), [6.34]. On proposed reforms specific to pension trusts, see Law Commission, ‘Pension Funds and Social Investment’ (2017) (Law Com No 374).
33 Cowan v Scargill (n 7).
34 Cowan v Scargill (n 7), 287.
35 Cowan v Scargill (n 7), 292.
36 LC 350 (n 32), [4.42].
37 Freshfields Report (n 15), 88.
38 Lynton Tucker, Nicholas Le Poidevin, and James Brightwell, Lewin on Trusts (20th edn, Sweet & Maxwell 2020), [35-061]: ‘ … the trustees must put aside, not only their personal interests, but also their views about social and political issues’; John McGhee QC (ed), Snell’s Equity (34th edn, Sweet & Maxwell 2022), [29-007]: ‘The trustees must not … allow their own social or political views to affect their investments’. Cf Jamie Glister and James Lee, Hanbury & Martin: Modern Equity (22nd edn, Sweet & Maxwell 2021), [19-020]: ‘Where the trust instrument is silent on the matter, trustees may include ethical considerations in the policy statement, subject to their general law duties’.
39 Freshfields Report (n 15), 89.
40 Freshfields Report (n 15), 89.
41 See generally Part 2 above.
42 Luke Broadway, Toby Graham and David Russell QC, ‘Trustee Investment: Ethical Investing’ (2021) 27 T&T 597; Schanzenbach and Sitkoff (n 25), 436.
43 Daykin (n 25), 166.
44 Pursuant to the Trustees Act 2000, s 4(3)(b); see Schanzenbach and Sitkoff (n 25), 409.
45 LC 350 (n 32), [6.24]–[6.32].
46 LC 350 (n 32), [6.34].
47 [2020] UKSC 16, [43].
48 See Law Commission, ‘Pension Trustees’ Duties when Setting an Investment Strategy: Guidance from the Law Commission’ (1 July 2014) (‘Law Commission (2014)’).
49 Harries v Church Commissioners for England [1992] 1 WLR 1246 (Ch) 1251.
50 Law Commission (2014) (n 48), [1.31].
51 Law Commission (2014) (n 48), [1.31], citing Harries (n 49), 1251 (but this case concerned a charitable trust).
52 Cowan v Scargill (n 7), 295. Cf Law Commission (2014) (n 48), [1.34].
53 [2022] EWHC 1233 (Ch), [188].
54 Although a recent survey revealed that many asset managers have been engaging in negative screening before shifting towards ESG integration: BNP Paribas, ESG Global Survey 2023 (December 2023) <https://securities.cib.bnpparibas/app/uploads/sites/3/2023/12/esg-global-survey-consolidated-report.pdf> accessed 20 January 2024. However, it is not clear if such negative screening was conducted with financial (or non-financial) considerations in mind. The literature also alludes to the possibility of trustees ‘quietly’ taking non-financial factors into account when investing: Broadway (n 30), 859.
55 LC 350 (n 32), [7.37].
56 Law Commission (2014) (n 48).
57 Law Commission (2014) (n 48), [1.6].
58 Harries (n 49).
59 Harries (n 49), 1246.
60 [2022] Ch 371.
61 Butler-Sloss (n 60), [78].
62 Although what degree of conflict is required for the exception to be invoked may require further judicial clarification: Rebecca Fry, ‘Ethical Investments by Charity Trustees: Some Answers, New Questions’ (2023) 82 CLJ 9. See also Broadway (n 30).
63 Butler-Sloss (n 60), [78].
64 Butler-Sloss (n 60), [86].
65 Butler-Sloss (n 60), [32].
66 Butler-Sloss (n 60), [86].
67 The Charity Commission, ‘Update on investment guidance following Butler-Sloss case’ (15 November 2022) <https://www.gov.uk/government/news/update-on-investment-guidance-following-butler-sloss-case> accessed 20 January 2024.
68 Even though Green J accepted the Charity Commission’s definition of ethical investment, which includes both negative and positive screenings: Butler-Sloss (n 60), [39].
69 For example, the Local Government Pension Scheme (Management and Investment of Funds) Regulation 1998 does appear to envisage a general power of investment restricted only by what’s explicitly provided for in the regulation.
70 Hence the deadlock among the trustees in Cowan v Scargill despite the scheme containing a clause allowing amendment to its terms. See also Freshfields Report (n 15), 88.
71 Re Wragg [1919] 2 Ch 58.
72 Trustee Act 2000, s 3.
73 Trustee Act 2000, s 1.
74 Trustee Act 2000, ss 4(1) & 5(1). There is also the duty to review the investments from time to time having regard to the standard investment criteria and with proper advice: Trustee Act 2000, ss 4(2) & 5(2).
75 Hanbury & Martin (n 38), [19–019].
76 Speight v Gaunt (1883-84) LR 9 App Cas 1 (HL).
77 Lloyd Brown, ‘Cowan v Scargill and the Fiduciary Duty of Investment: Has the Nature of the Investment Duty Changed and What is Currently Driving ‘Socially Responsible Investing’ in Pension Schemes?’ (2020) 26 T&T 756; Alastair Marke, ‘Establishing the Legal Obligations of Pension Fund Trustees to Divest from Climate-Unfriendly Portfolios’ (2018) 12 Carbon & Climate L Rev 297; Schanzenbach and Sitkoff (n 25).
78 Snell’s Equity (n 38), [29-007]: ‘The trustees’ investment powers must be exercised in accordance with the purpose of the trust. Prima facie the purpose of the trust is best served by seeking the maximum return consistent with commercial prudence’. See also Daykin (n 25).
79 John Kay, The Kay Review of UK Equity Markets and Long-Term Decision Making (Third Report of Session 2013-14) (House of Commons) (2012), Ev 97; Freshfields Report (n 15), 85–86.
80 Hanbury & Martin (n 38), [19–019].
81 Trustee Act 2000, s 6(1)(b).
82 Henry Wickham, ‘All in the Balance: Sustainable Investment and the Role of the Fiduciary’ (2020) 26 T&T 303.
83 Wickham (n 82), 304-305.
84 In re Courage Group’s Pension Schemes [1987] 1 WLR 495 (Ch); Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 (PC); Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71; Grand View Private Trust Ltd v Wen-Young Wong [2022] UKPC 47.
85 Grand View Private Trust Ltd (n 84), [57].
86 Grand View Private Trust Ltd (n 84), [63].
87 Darker green denotes greater environmental impact: see Nadia Humphreys, Murat Bozdemir and Rokhsana Saddighzadeh, ‘Shades of Green: Classifying ESG Funds’ (Bloomberg, 1 February 2023) <https://www.bloomberg.com/professional/blog/shades-of-green-classifying-esg-funds/> accessed 20 January 2024.
88 Trustee Act 2000, ss 4(1).
89 See Part 4.E below for comparison with the business judgment rule in company law.
90 Re Van Straubenzee [1901] 2 Ch 779, 785.
91 On the trust-corporate structure, see Man Yip, ‘Trust-owned companies: understanding the trustee’s duties’ (2017) 31 TLI 185.
92 For the legislative background of the section, see BTI 2014 LLC v Sequana SA [2022] UKSC 25, [371]–[386] (Lady Arden).
93 BTI 2014 LLC (n 92), [140] (Lord Briggs).
94 See generally Andrew Keay, The Enlightened Shareholder Value Principle and Corporate Governance (Routledge 2013), Chapter 4; Andrew Keay, ‘Enlightened Shareholder Value, The Reform of the Duties of Company Directors and the Corporate Objective’ [2006] LMCLQ 335; Virginia Harper Ho, ‘‘Enlightened Shareholder Value’: Corporate Governance Beyond the Shareholder-Stakeholder Divide’ (2010) 36 J Corporation L 59.
95 See Part 2 above.
96 Paul Davies, Sarah Worthington and Christopher Hare, Gower: Principles of Modern Company Law (11th) edn, Sweet & Maxwell 2021), [10-027]; John Birds, ‘Chapter 15: Directors’ Duties’ in Alistair Alcock and Michael Todd (eds), Gore-Browne on Companies (Jordan Publishing 2023), [10B].
97 See R on the Application of People and Planet v HM Treasury [2009] EWHC 3020.
98 Dionysia Katelouzou and Dan W Puchniak (eds), Global Shareholder Stewardship (CUP 2022).
99 Financial Reporting Council, ‘UK Stewardship Code’, 4 <https://www.frc.org.uk/investors/uk-stewardship-code)> accessed 20 January 2024.
100 Paul Davies, ‘The UK Stewardship Code 2010–2020: From Saving the Company to Saving the Planet?’ in Katelouzou and Puchniak (n 98) Ch 2, 62–63.
101 Companies Act 2006, s 171.
102 ‘ESG Aligned Company Articles’ (The Chancery Lane Project, 18 Jun 2022) <https://chancerylaneproject.org/climate-clauses/esg-aligned-company-articles/> accessed 20 January 2024.
103 Andrew Keay and Joan Loughrey, ‘The Concept of Business Judgment’ (2019) 39 LS 36, 38. See also Gower (n 96), [10–029] and [10-032]; Mary Arden, Dan Prentice and David Richards, Buckley on the Companies Acts (15th edn, LexisNexis 2023), [917]; Aurelio Gurrea-Martínez, ‘Re-Examining the Law and Economics of the Business Judgment Rule: Notes for its Implementation in Non-US Jurisdictions’ (2018) 18 JCLS 417, 418; Jenifer Varzaly, ‘Protecting the Authority of Directors: An Empirical Analysis of the Statutory Business Judgment Rule’ (2012) 12 JCLS 429.
104 This simply codifies the common law position as set out in Re Smith & Fawcett Ltd [1942] Ch 304 (CA), 306 (Lord Greene MR). For an example of a statutory formulation of the business judgment rule, see the Corporations Act 2001 (Commonwealth, Australia), s 180(2).
105 Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515. Depending on the governing law, it may well be that such a duty is imposed by statute: see, for example, the BVI Virgin Islands Special Trusts Act (Rev Ed 2020), ss 4, 5 and 8.
106 In practise, the Bartlett duty is typically discharged by the appointment of a trustee or nominee onto the board of directors. However, as explained earlier, it is best to avoid any overlap between the office of trusteeship and the board of directors.
107 See generally Toby Graham and David Russell, ‘The Bartlett Duty Revisited- An Imperfect Fusion of Trust and Company Law and Practice’ (2021) 27 T&T 850; Hanbury & Martin (n 38), [19-022]; and Lewin (n 38), [34-056].
108 [2019] HKCFA 45. See Rebecca Lee and Man Yip, ‘Exclusion of Duty and the Irreducible Core Content of Trusteeship: A Re-Assessment’ (2020) 10 J Eq 131; David Hayton, ‘Anti-Bartlett Clauses after IQEQ in the Hong Kong Court of Final Appeal’ (2022) 28 T&T 294.