I was interested to read, and welcome, the recent We Are Guernsey report entitled 'Fiduciary Duty in the 21st Century'. The report addresses a key question for trustees in the ESG debate, namely whether or not they should in some way feel hindered from fully embracing ESG investing by the fiduciary obligations imposed upon them, by law, to act in the best interests of beneficiaries.
This debate forms part of a much wider one which has enormous implications, not just for trustees and beneficiaries in Guernsey, but for all trustees and beneficiaries including those of pension funds, and indeed for society as a whole. In fact the debate has implications for the very economic model that has underpinned the Western world for decades. If that sounds like hyperbole, bear with me.
The sustainable- and impact-minded revolution, which incorporates concepts like ESG but also things like B Corporations, has gathered huge momentum in recent years. ESG, standing for Environmental, Social and Governance, is in simple terms a way of evaluating companies based on criteria that go beyond their financial performance. This includes their role as a steward of the environment, their impact on employees, customers and the wider communities in which they operate, and the strength of their governance.
B Corporations are better defined. According to the mission statement of B Lab, a company which certifies other companies with the ‘B Corporation’ stamp, B Corps are “a new kind of business that balance purpose and profit. They are legally required to consider the impact of their decisions on their workers, customers, suppliers, community, and the environment.”
Whilst they are different concepts operating in different ways, ESG and B Corps are cut from similar cloth. Both centre around moving companies away from a focus on pure profit to the balance of profit and other objectives which benefit others. Ultimately, both form part of a trend that some refer to as ‘sustainable’ or 'stakeholder' capitalism - the idea that our economic model can be re-wired to become more sustainable, and ethical, whilst retaining the creative forces that have driven growth in so much of the world for longer than most of us have been alive. You may see it as the future; you may think it is fundamentally flawed. Either way you will likely have an opinion.
Which is why developments on ESG and B Corps, and particularly legal developments, should be watched with such interest. Investors are already driving change - see the huge growth in demand for ESG in recent years, or examples of ‘activist’ shareholders such as in the recent high profile case of ExxonMobil. Companies themselves are doing likewise - see the 2019 statement of the Business Roundtable here - including signatories from JP Morgan, Ford, Johnson & Johnson and 178 others - regarding a move "away from shareholder primacy" and towards the "benefit of all stakeholders".
But if the the law - through the legislators that make it and the judges that interpret it - start to nudge individuals and fiduciaries, i.e. directors of companies and trustees of trusts, towards the behaviours that these concepts encourage, the current enthusiasm towards them could turn into something much more significant.
At present, the legal evolution is focused on the broadening of the meaning of the word 'benefit'. Take for example the recent case of the May Trust in Jersey, where the Jersey Royal Court determined that much of the old case law was too focused on 'financial' benefit. Instead, it held that 'benefit' in Jersey trusts law may include the application of trust monies to provide social or educational benefits, or in discharge of what a beneficiary believes to be his or her moral obligation.
It is not just the courts, however. Legislators are also focused on the same point. Consider developments in Delaware, where legislators have passed a bill which tweaks the law on fiduciary duties. When making investment decisions, Delaware fiduciaries must now consider "the beneficiaries’ personal values, including the beneficiaries’ desire to engage in sustainable investing strategies that align with the beneficiaries’ social, environmental, governance or other values or beliefs of the beneficiaries."
These developments, and many others like them in courts and parliaments around the world, might at first sight seem to be mainly of academic interest. In fact they are of huge, real-world significance. They show a clear direction of travel; the age-old understanding of fiduciary duties is changing. What we don't know is exactly where the trend will go next. But given the trajectory, it is not that much of a jump to imagine that one day all fiduciaries might be obliged to consider other stakeholders, and wider impact, in making their decisions.
This would amount to a fundamental reinterpretation of one of the key legal concepts underlying our economic model. Arguably it would signal the arrival of 'stakeholder' capitalism, but without fanfare or announcement, through the gradual evolution of a nuanced point of law. It would amount to a legal revolution.
So next time you see an update on the latest legal development on ESG, or B Corps, it is worth paying attention. It may be more significant than it seems.
WE ARE GUERNSEY has produced a new report on fiduciary duty and the position of Guernsey’s practitioners in respect of intertwining ESG principles and fiduciary duty appropriate for the 21st Century.