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BarJournal ESTATE PLANNING

JU LY /A UGUST 20 15
feATUre imPAcT inVesTing for ohio

irreVocABle TrusTs

BY LAWRENCE HATCH

rust beneficiaries are increasingly What is Impact Investing? scores, without sacrificing risk-adjusted
interested in deploying their Generally speaking, it means tilting or returns. Recent commentary suggests that
trusts’ capital consistently with aligning a portfolio towards companies ESG integration can produce returns by
their values. One way to do with exemplary environmental, social and giving an investor access to relevant data
T that is impact investing, which governance factors using positive screens not captured by many traditional financial
is a process designed to align environmental, (ESG integration), excluding industries indicators. Additionally, consideration of
social, governance and faith-based goals with or companies deemed objectionable using ESG factors can reduce the overall risk of
an investment portfolio. Endowments and negative screens (divesting) or emphasizing the portfolio by helping avoid companies
foundations are driving most of the impact thematic issues such as women in leadership. whose operations could be disrupted by
activity with a dual focus on financial returns ESG integration involves traditional financial environmental scandals, labor problems and
and social values. However, as a mission-related analysis and positive screens to align or tilt governance issues (e.g., avoiding Volkswagen
investment culture grows throughout the a portfolio towards companies with high or because of its poor governance score in
charitable world, trustees of irrevocable trusts improving ESG scores. ESG data is reported advance of the emissions scandal).
are taking notice on behalf of their beneficiaries. by companies or gathered by third parties
In the past, trustees have not had much who then organize and sell the data to Ohio’s Prudent Investor Rule
evidentiary support for investing alongside their investment firms. The “prudent investor” concept in the UPIA
beneficiaries’ values. Now, though, there are three Divesting, often referred to as Socially has been adopted by 46 US jurisdictions
converging trends making it easier for trustees to Responsible Investing (“SRI”), relies on and is generally considered the law of the
implement impact investment programs that negative screening (i.e., the intentional land (although some state-specific nuances
are capable of delivering competitive returns: an divestment of capital from certain sectors). exist). The UPIA embraces modern portfolio
increase in data available to support investors; Impact investing can include some negative theory and a total return approach to
a shift from negative to positive screening; and screening but more commonly focuses on fiduciary investing. Asset allocation is more
the proliferation of investment options across ESG integration. The distinction between important than individual security selection
asset classes and international borders. Impact ESG integration and the historical approach and diversification is critical to enhancing
investing in the US actually represents around to SRI is critical. SRI evolved by creating risk-adjusted returns. Pursuant to this
one-fifth of all investments under professional negative screens for tobacco, gun, oil, liquor, concept, fiduciary investment decisions can
management. Ohio Trustees interested in casino and other so-called “sin” or “vice” be made in the context of the risk and return
engaging in impact investing are not alone! stocks. Excluding those stocks made some of the whole portfolio rather than isolating
Still, trustees need to be comfortable that investors feel better about how their capital individual investments for scrutiny.
impact investing can work in an irrevocable trust was deployed. However, from an investment Ohio adopted the OPIA in 1998. The
under the Ohio Uniform Prudent Investor Act perspective, the “sin” or “vice” stocks OPIA was then moved when Ohio adopted
(RC 5809.01 - “OPIA”), including the prudent sometimes outperformed the market. its trust code in 2007. RC 5809.02 specifically
investor rule, the duty to diversify, and the duty of A non-fiduciary can make a personal choice calls for a trustee to manage trust assets
loyalty. That seems to be the case with a sufficient to sacrifice returns in exchange for a hoped- prudently, consider all the circumstances
amount of diversification, a selection process for impact. Should a trustee of an irrevocable of a trust, exercise care, skill, and caution,
designed in an effort to avoid sacrificing trust make the same choice? The comments and evaluate trust assets within the context
economic returns and a similar or lower cost to Section 5 of the Uniform Prudent Investor of the trust portfolio as a part of an overall
relative to other prudent investments. Where Act (UPIA) suggest that doing so might be investment strategy. Additionally, a fiduciary
fiduciary concerns linger, specific drafting a breach of the duty of loyalty. However, should consider all circumstances including
should help, initially or with a modification ESG integration is fundamentally different economic conditions, the effect of inflation
under the Ohio Trust Code’s decanting or from the initial iterations of SRI. It does not or deflation, the role each investment will
non-judicial settlement agreement provisions. necessarily exclude any industry or company play within the overall trust portfolio, and
Obtaining beneficiary consents is another way but rather identifies otherwise prudent the total expected return. The statutory duty
to proceed if changing the instrument is not investments and then tilts the portfolio to diversify is set forth in RC 5809.03 and
possible or pragmatic. towards companies that have the best ESG continues to play an important role in Ohio.
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