Charles E. Rounds Jr.: The law of trusts and the fiduciary conundrum of ESG-investing politics (December 11, 2022)

Charles E. Rounds Jr., of Suffolk University Law School, has made available for download his article, “The law of trusts and the fiduciary conundrum of ESG-investing politics”, published in JDSUPRA. The abstract is as follows:

The trustee who ESG invests fiduciary funds signals his personal support for environmental, social, and governance causes unrelated to the trust’s purposes and its beneficiaries’ pecuniary interests. Take the G part. Assume trustee of an irrevocable trust for a child’s education elects to invest a portion of trust res in companies producing satellites, but only in those with a sizable percentage of hard-science PhDs on their boards. That’s not ESG investing, the purpose of the caveat being to maximize trust estate’s economic value, not to signal personal solidarity with the scientific community. But if trustee, to signal, say, personal solidarity with society’s elderly, makes a public display of avoiding companies with boards lacking age diversity, that would be ESG investing. Cf. Gray & Berry, Nasdaq’s Boardroom Diversity Push Isn’t Evidence-Based, WSJ, April 29, 2021.

Common law as enhanced by equity provides that “[a] trustee ordinarily violates the duty of loyalty by using trust property to benefit anyone other than the beneficiaries, or to accomplish any objective other than a trust purpose.” 3 Scott & Ascher §17.2.3. “We conclude that the duty of loyalty…forbid[s] social investing in its current form.” Langbein & Posner, Social Investing and the Law of Trusts, 79 Mich. L. Rev. 72, 76 (1980). See also Rest. (Second) of Trusts §170 cmt. q (“The trustee is under a duty to the beneficiary in administering the trust not to be guided by the interest of any third person”).

Consider unlikely situation of two companies being identically suited in all respects for inclusion in the portfolio of the child’s trust. One is non-ESG-compliant. Is the trustee free to signal the trustee’s personal solidarity with ESG constituencies by investing fiduciary funds in the other? Is equity fine in theory with such a “tiebreaker”? Time will tell. In practice, however, if the ESG-compliant company underperforms relative to non-compliant one and it comes out at trial that the trustee knew at the outset that the non-ESG-complaint company had been better suited for the portfolio, then the trustee could be held personally liable not only for consequential investment losses but also for the fees of the special master tasked with running the “identicality” numbers. As to the constructive-fraud implications, see §8.15.60 of Loring and Rounds: A Trustee’s Handbook (2023), which section is reproduced in appendix below. Handbook is available for purchase at

Click here to view Charles E. Rounds Jr.’s summary of “The law of trusts and the fiduciary conundrum of ESG-investing politics

Posted by Marin Larkin, Associate Editor, Wealth Strategies Journal.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s