Commentary on Sections Part 1 – Trusts Investment
34.Sections 18 and 19 of the Act implement recommendation 18 in the Report on Trust Law.
35.Section 18 of the Act is based on the investment powers of trustees in section 4 of the 1921 Act, in so far as it was amended by section 93 of the Charities and Trustee Investment (Scotland) Act 2005 (“the 2005 Act”). Subsection (1) is a default provision and grants trustees wide powers of investment of trust property. The effect is that trustees will generally have the same powers of investment as if they were the beneficial owners of the trust estate (for example, they can invest trust property in stocks and shares or in heritable property). By subsection (2) the powers under subsection (1) are subject to statutory restrictions or exclusions and are not available to trustees of authorised unit trusts (which are subject to special statutory provision for investment by trustees) or any other trust whose trustees have separate statutory entitlement to make investments. (Subsection (5) defines the term “authorised unit trust”.)
36.Section 19 of the Act is mandatory, and re-enacts section 4A of the 1921 Act, as inserted by section 94 of the 2005 Act. It applies irrespective of when the trust was created (subsection (5)). Trustees are required to exercise a duty of care in the execution of all their functions, which is provided, generally, by section 31 of the Act. Section 19 specifies the particular duty of care which additionally applies when exercising powers of investment. One aspect of that duty, arising from the common law, is that trustees are required to consider the interests of all the beneficiaries, and in particular to balance the interests of liferenters and fiars, and to keep the trust investments under review (Clarke v Clarke’s Trustees 1925 SC 693, 711). Subsection (1) applies when trustees are proposing to make an investment. They are required to have regard to the suitability of what is proposed. This relates both to the kind of investment under consideration and to the particular investment as an investment of that kind. It will include considerations as to the size and risk of the investment and the need to produce an appropriate balance between income and capital growth for the trust. In addition, trustees are to take “proper advice”, unless subsection (3) applies. Subsection (2) applies to trustees when reviewing the trust investments. As under subsection (1), they are to take “proper advice”, except where subsection (3) applies. By subsection (4), the person from whom “proper advice” is to be taken is a person with expertise which is related to the type of investment under consideration. Thus for investment in shares and other financial instruments, advice would normally be sought from a stockbroker or other professional investment adviser. But trustees running a farm might need advice from an agricultural expert about a proposed acquisition of a herd of cows. By way of exception to the duty in subsections (1) and (2), subsection (3) provides that trustees need not obtain advice if in all the circumstances it would be unnecessary or inappropriate. For example, if the trust has limited funds it could be inappropriate for the trustees to get advice before placing the money in an interest-bearing account. Although there is no longer a requirement that the advice be given or confirmed in writing, as was the case under section 6(5) of the Trustee Investments Act 1961 (“the 1961 Act”), it would nevertheless be prudent for trustees to continue the practice of obtaining written advice for all but the smallest investments.
37.Section 20 of the Act elaborates on the powers in sections 18 and 19. It is a default provision which applies unless the trust deed, expressly or by implication, provides otherwise. It reflects (and places on a statutory basis) what was understood to be the common law position, taking account of case law on the exercise of trustees’ powers of investment.(9) Fundamentally, whether an investment is “suitable” to the trust must be assessed against the purposes of the trust for the beneficiaries (as set out in the trust deed or as implied or required by the context where there is no trust deed). However, where there is more than one suitable investment, trustees can take into account non-financial considerations when determining which investment to make, provided they also take proper advice on the investment.
38.Ethical, social and environmental considerations (sometimes known as “ESG” or environmental, social and governance factors) are explicitly stated examples of such non-financial considerations, although these do not exhaust the kinds of non-financial considerations that may be taken into account. For example, if there are two investments which are in line with the trust purposes then this provision gives trustees the flexibility to choose to invest in the investment that has better ESG credentials. This section applies to trusts created after the section comes into force.