Page 23 - December 2018 | Cleveland Metropolitan Bar Journal

There is no Ohio case law on whether investing” discussed in the UPIA comments agreement or obtaining beneficiary consents
impact investing is consistent with the and is consistent with the OPIA. In the absence and then partnering with an investment
prudent investor rule in RC 5809.02. of specific statutory or case law guidance, management firm which has ESG expertise
However, from a return perspective, an appropriate trust drafting, modifications and a well-defined impact process. In fact,
academic case is developing that a company and/or consents can help provide support for state legislatures are considering statutory
with a high ESG rating may be more efficient pursuing impact investing. clarifications specifically permitting impact
and successful over time than a similar Most instruments do contain general provisions in trust documents, led by
company with a low ESG rating; studies investment provisions and some waive the Delaware which recently added a new sub-
indicate that the use of ESG factors may duty to diversity. Much of this language paragraph (4) to Section 3303(a) in Title
actually improve investment results and might be broad enough to entirely waive 12 of the Delaware Code to do so. Finally,
that performance is generally neutral or the application of the OPIA. For example, a Delaware now specifically permits fiduciaries
positive. Interestingly, the studies so far do provision that says the trustee’s investment to take beneficiaries’ values into account when
not support the idea that impact investing by powers are not limited “by any restrictions investing under a modified Section 3302.
incorporating ESG factors necessarily leads on types of investments, statutory or judicial, This was adapted from articles by the
to lower returns. applicable to trustees or other fiduciaries” author’s colleagues in the Probate Law Journal
It is also possible to diversify across all asset gives a trustee a considerable amount of of Ohio and elsewhere.
classes and ensure risk is not concentrated flexibility. Trustees might take the position
in a few holdings even after ESG scores that the OPIA does not apply and therefore
are considered. Fees should be relatively impact investing is acceptable or could also Lawrence Hatch is Regional
the same as other portfolio management seek specific authorization or direction in the Director of Glenmede’s Ohio office
methods. As such, impact investing seems to trust agreement. based in Cleveland. Mr. Hatch
be consistent with RC 5809.02 since returns, For new agreements, drafting counsel oversees wealth advisory services
diversification and fees are competitive with might consider adding impact provisions for high net worth individuals and
the forms of investing that are generally to their standard investment powers. For manages the day-to-day operations of the Ohio
considered prudent in the current investing existing agreements, non-judicial settlement office. He has been a member since 1987. He
landscape. Does that mean a trustee can agreements or decantings could be viable can be reached at (216) 514-7884 or lawrence.
conclude an ESG integration approach to alternatives to add impact provisions. Trustees hatch@glenmede.com.
impact investing is consistent with the OPIA? with absolute discretion could proceed with
The last (and perhaps highest) hurdle is the a decanting under RC 5808.18(A). For trusts
duty of loyalty. with more limited distribution standards or
with non-judicial settlements, adding impact
Ohio’s Duty of Loyalty provisions should not be considered material
The duty of loyalty requires a trustee to since beneficial interests are not being Promoting
administer the trust solely in the interests changed, the normal safeguards provided by Philanthropy through
of the beneficiaries. Comments to the UPIA the fiduciary relationship still exist, and the
from 1994 suggest that “social investing” strategy should be competitive.
might violate the duty of loyalty. Negative Of course, if a particular trust document
screening was the dominant form of values- is difficult or not practical to modify, the The Invest West Program
aligned investing when those comments trustee could simply request consents from • Philanthropic Services
were published, however, and they might the beneficiaries under RC 5810.09. All of
have been correct given the forms of these approaches have the benefit of being • Colleague Program
“social investing” prevalent at the time. transparent to the beneficiaries, who are
ESG integration, though, is fundamentally always happier with open and productive • Financial Advisor Program
different. In this methodology, positive communication from their trustees.
screens replace negative screens and prudent
portfolios are aligned with environmental, Conclusion
social, governance or faith- based values. Impact investing seems to be consistent with
Investors are using ESG frameworks to build the OPIA if the trustee uses an ESG integration
competitive, diversified portfolios, including process designed to be a prudent fiduciary
stocks, bonds and private investments, which portfolio from a return, fee and diversification
can be fee neutral when compared to other perspective. Other forms of impact investing
fiduciary investment strategies. may also work for Ohio fiduciaries, but
should be considered in the context of the
A Way Forward specific strategy at issue. However, in light
How should Ohio trustees proceed with of the 1994 comments to the UPIA, a trustee
impact investing? For the reasons stated might still consider using specific provisions 800 Sharon Drive, Suite C • Westlake, Ohio 44145
above, a trustee might conclude that impact authorizing impact investing (either (440) 360.7370 • www.communitywestfoundation.org
investing is different from the “social initially or with a modification) in the trust
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