Introduction: defining the tension
The question invites consideration of the scope and content of trustees' investment duties, focusing on whether and when non-financial considerations may influence investment strategy. The orthodox position, established in Cowan v Scargill [1985] Ch 270, is that trustees must prioritise beneficiaries' financial interests and may not subordinate return to political, social, or ethical preferences unless all beneficiaries consent or there is no risk of significant financial detriment. However, this binary framework has been questioned in light of evolving understandings of fiduciary duty, the rise of environmental, social, and governance (ESG) investing, and recognition that beneficiaries may have non-pecuniary as well as pecuniary interests.
This essay examines the doctrinal foundations of the Cowan v Scargill rule, identifies exceptions and qualifications developed in subsequent case law and academic commentary, and evaluates whether reform is warranted.
I. The orthodox position: financial return as paramount duty
In Cowan v Scargill, Megarry V-C held that the National Coal Board pension trustees could not refuse investments in oil, overseas assets, or industries competing with coal for political or social reasons. He stated:
'When the purpose of the trust is to provide financial benefits for the beneficiaries… the best interests of the beneficiaries are normally their best financial interests' (at 286).
This reflects the traditional view that the trustee's duty of loyalty requires single-minded pursuit of financial advantage. Trustees are not entitled to impose their own moral preferences or to sacrifice return for non-financial objectives, however worthy. Megarry V-C acknowledged two exceptions: (a) where there is no significant risk of financial detriment; (b) where all beneficiaries are sui juris and unanimously consent.
The decision rests on two justifications. First, beneficiaries (especially pension scheme members) expect financial security; substituting the trustee's ethical views for the settlor's intent or the beneficiaries' interests is a breach of duty. Second, allowing non-financial considerations invites inconsistency, litigation, and trustee self-dealing.
II. Qualifications and exceptions
(a) Charity trustees and purpose-compatible investment
In Harries v Church Commissioners [1992] 1 WLR 1241, Sir Donald Nicholls V-C held that charity trustees may exclude investments that conflict directly with the charity's purposes, provided there is no significant financial detriment. For example, a cancer research charity may avoid tobacco stocks; an environmental charity may eschew fossil fuels. The Vice-Chancellor reasoned that investing in a manner inconsistent with the charity's aims may alienate donors and undermine its mission, causing reputational harm.
The principle is narrow: it permits purpose-based screening only where (i) the investment directly conflicts with the charity's objects, and (ii) alternative investments are available at comparable return. It does not license wholesale ethical screening.
(b) Unanimous consent of beneficiaries
If all beneficiaries are ascertained, sui juris, and absolutely entitled, they may direct trustees to adopt non-financial investment criteria, or they may collapse the trust and invest as they choose under Saunders v Vautier (1841) 4 Beav 115. This exception is uncontroversial: beneficiaries are the equitable owners and may waive financial maximisation.
In practice, unanimous consent is rare in family trusts and impossible in pension schemes or charitable trusts.
(c) Financial materiality of ESG factors
The Law Commission's 2014 report on fiduciary duties of investment intermediaries concluded that trustees may—and in some cases must—consider ESG factors if they are financially material. Climate risk, corporate governance failures, and social sustainability may affect long-term returns; ignoring them could breach the duty of care.
This reframes the debate: ESG integration is consistent with Cowan v Scargill if it advances, rather than sacrifices, financial interests. However, the boundary between material ESG factors and ethical preferences is contested.
III. Critiques of the orthodox position
(a) The conflation of beneficiaries' interests with monetary return
Cowan v Scargill assumes beneficiaries care only about financial return. This is empirically dubious. Beneficiaries may have strong preferences about how wealth is generated (e.g. avoiding arms, tobacco, or fossil fuels). Ignoring these preferences treats beneficiaries as homo economicus, disregarding their autonomy and values (Harding (2008) 71 MLR 344).
Some argue trustees should ascertain beneficiaries' preferences and, where unanimous or widespread, incorporate them into investment policy. This respects beneficiary autonomy without abandoning fiduciary duty.
(b) Systemic and intergenerational risk
Trustees managing long-term trusts (especially pension funds) must consider systemic risks—climate change, resource depletion, social instability—that may not be priced into short-term returns but threaten long-term value. Investing solely on the basis of current market prices may be imprudent if those prices fail to reflect tail risks.
Moreover, trustees owe duties to future as well as current beneficiaries. Prioritising income for life tenants at the expense of capital preservation for remaindermen may breach the duty of impartiality. Similarly, investments that externalise environmental or social costs onto future generations may be contrary to beneficiaries' overall, long-term interests (Richardson (2011) 13 Environmental Law Review 248).
(c) The artificial separation of ethics and finance
The binary distinction between financial and ethical investment is increasingly untenable. Governance quality, environmental stewardship, and social licence to operate are recognised by investors, regulators, and markets as material to value. The Principles for Responsible Investment (PRI), supported by major institutional investors, integrate ESG criteria into fiduciary duty frameworks.
On this view, the question is not whether trustees may consider ethics but how to identify and manage financially material factors, some of which have ethical dimensions.
IV. Proposals for reform
(a) Default ESG integration with opt-out
Trustees could be required, as a default, to integrate financially material ESG factors into investment analysis, with settlors or beneficiaries free to opt out. This would align trust law with evolving investment practice without imposing ethical constraints where unwanted.
(b) Ascertaining and respecting beneficiary preferences
Where practicable, trustees should consult beneficiaries about investment preferences and, if a clear consensus exists, incorporate it into investment policy. This could be formalised by statute or guidance (cf. Pensions Act 2004, s 244 (statement of investment principles)).
(c) Clarifying the duty of impartiality
Statutory or judicial guidance could clarify that trustees must balance the interests of current and future beneficiaries, taking account of intergenerational equity. This would support long-term, sustainable investment strategies.
Conclusion
The Cowan v Scargill principle—that trustees must prioritise financial return—remains good law, but its application is more nuanced than often assumed. Trustees may (and sometimes must) consider ESG factors if financially material; charity trustees may exclude investments inconsistent with their purposes; and beneficiaries may consent to non-financial criteria.
The challenge is to articulate a framework that respects beneficiaries' autonomy and diverse interests, integrates financially material sustainability considerations, and maintains fiduciary accountability. Reform should focus not on abandoning the primacy of beneficiaries' interests but on recognising that those interests are not reducible to short-term monetary return. The law should permit, and in some cases require, trustees to invest for long-term, holistic value consistent with beneficiaries' informed preferences.