Where you bank, where you spend your money, how you invest and even the legacies you leave on your death all have ethical consequences.
It may not always be obvious that the choices you make in respect of your finances may, indirectly, fund companies and projects you might not ordinarily wish to support.
The news of late has been awash with stories of retail banks, pension, savings and investment funds using their customer’s money to fund fossil fuel developments, destructive mining, and activities that accelerate the destruction of rainforests and wildlife habitats.
Against the backdrop of greater awareness on issues such as climate change, and more widely the ethical concerns around how savings and deposits are deployed around the world by investment professionals, a growing number of investors and savers are choosing to put their money into more progressive and socially responsible organisations and development activities. These include ‘ethical banks’ that invest in socially responsible companies and strive to be transparent with their customers about their lending policies. This trend also extends beyond personal banking to investment and estate planning.
For some time, we have seen trustees of charitable organisations positively or negatively screening the funds and stocks in which the charity invests. For example, it is common for trustees of charities with a focus on health to avoid funding tobacco or fast food companies. However, trustees often have to weigh up the need to align their investments with the charitable objectives of that particular charity against their duty to invest the trust funds prudently. They are also under a duty to diversify the trust or charity’s investment portfolio to spread risk.
A trustee who screens out companies that typically provide higher income but have a lower ethical rating may not be acting prudently if these decisions have the effect of reducing the charity’s income stream.
Compounding matters for the trustee is the received wisdom that investing in socially responsible companies will not produce the same returns as traditional investments. While this argument against the profitability of ethical companies has been shown to be largely unfounded, it is important that trustees continue to comply with their duties while seeking to be more ethical.
As the popularity of ethical investment grows, we expect to see a growing number of entrepreneurs and high-net-worth individuals become more socially responsible with their personal investments and succession planning.
We help many clients set up trusts in their wills, which are typically invested in investment portfolios. However, it is rare that we receive directions from them as to how the trust fund should be invested. There is an opportunity to do so in a ‘letter of wishes’ that can accompany a will. This letter guides the trustees as to who the beneficiaries of the trust should be, as well as their ultimate over-arching intentions for the money.
There seems to be a missed opportunity here for the testator – the person making a will – to leave guidance about where their money should be invested and how the trust funds they leave in death should align to their ethical considerations in life.
It is also common for individuals to leave considerable sums to charity in their wills. Where the testator has left more than ten per cent of their net estate to charity, the estate can benefit from a reduced rate of Inheritance Tax on the remainder. We have also recently seen clients taking a more active interest in making relationships in life with the charities they intend to benefit on their death. It is often important for them to know how the charity will spend their legacy, and to be involved in the decision-making to make sure it aligns with their own ethical priorities.
There are many options already open to people to determine where their money is invested, and to be more prescriptive about the ethical concerns or good causes with which they wish to align themselves in life and in death.
We anticipate, as the recent climate change protests and impassioned call to arms from the teenage activist Greta Thunberg have shown, that such ethical considerations are even closer to the hearts of the younger generation and will certainly be high on their list of investment priorities in the years to come.
Christopher McGill is a Partner in the Private Client practice, Shepherd and Wedderburn LLP