Nicola Swan and Daniel Kalderimis: A live and pressing question

An aerial view of flooding in Napier after heavy rain. Photo / Supplied

New Zealand's passion for holding property in trusts — of all shapes and sizes — shows no sign of abating.

Nor do examples of physical and financial damage to property and investments experienced around the country as a result of climate change. There is therefore a live and pressing question as to how trust law and climate change intersect.

Globally, the financial risk from climate change is understood with increasing sophistication. New Zealand business, government, and communities have a much greater understanding of the risk from climate change to investment performance, including property, from regulatory developments in the last three years. This has been bolstered by the Climate Change Commission's recent advice to Government on the transition to a low-carbon economy, and the pending introduction of legislation requiring mandatory climate risk disclosures from business. At the heart of this legislation is the goal that businesses better identify, understand, and manage the risks to their business that will materialise as a result of climate change.

In late 2019 we wrote a legal opinion for the Aotearoa Circle, a major public-private partnership focused on safeguarding NZ's natural capital, explaining that company directors and fund managers of managed investment schemes needed to be alert to climate change financial risk. We said that that material financial risks needed to be taken into account in decision-making, that the physical and economic impacts of climate change are increasingly recognised as a material financial risk, and that in these cases directors and fund managers needed to take climate risk into account in their decision making. Boards around the country are making the move — if they haven't already — to properly assessing the climate-related risk to their business.

This week, we published a further legal opinion for the Aotearoa Circle which confirms this common sense legal advice for New Zealand trustees. The opinion is based on trustees' duties to act in the best interests of beneficiaries, to invest prudently, and to act impartially between beneficiaries. The outcome will not be surprising. What is perhaps more interesting is to consider what types of trustees are likely to be most at risk and how they can best protect themselves.

Given the large number and different types of trusts in New Zealand, every situation is different. We do not expect courts to go out of their way to impose burdensome requirements to consider climate risk in contexts where it is indirect or remote. But we do consider courts will take seriously claims by beneficiaries that a trust estate has been materially eroded by trustees failing to turn their minds to clearly signalled material risks to trust assets.

Daniel Kaldermis. Photo / Supplied

Suppose a trust estate comprises a beachfront property portfolio which has become uninsurable, or a farm on a flood plain, or an orchard suffering from water shortages. We can all anticipate the questions that may arise. Should the trustees have acted sooner to sell the properties, or otherwise mitigate the increasing risk that their value would be compromised by climate change? Trust litigation is often internecine and personal. Where new legal arguments become available to disappointed beneficiaries, we can expect them to be made and tested. Professional trustees are especially exposed, as they are held to a higher standard of care. But even ordinary trustees of family trusts should not discount the prospect of a millennial beneficiary raising climate change arguments on realising that family property expected to be safeguarded down the generations has lost significant value. After all, intergenerational equity is a key concept common to both climate change advocacy and trust law.

In many ways, this is the story of climate change as a material financial risk. Climate change litigation should be recognised as a financial risk like any other. The dynamic of determining who bears the loss of a trust estate eroded by climate change will play out in New Zealand courts on a case-by-case basis, depending on the terms of the particular trust deed, the particular property, and the type of trust. But overall, the law will be clear: trustees do have a duty to take into account any material financial risks posed to the trust estate by climate change. The question, in each case, will be — have the trustees adequately done so?

Nicola Swan. Photo / Supplied

Trustees who wish to protect themselves, and future trust beneficiaries, should identify and assess climate-related financial risk to determine whether that risk is likely to be material. While ever context-dependent, trustees should actively consider whether trust investments are at risk of material financial impact as a result of physical impact or regulatory, market or legal developments connected to climate change. If so, then those trustees should appropriately manage that risk over the mid to long term, including by diversification and/or divestment of certain investments if appropriate. These assessments are not easy, but they are important for trustees to work through to properly discharge their duties to present and future beneficiaries.

● Nicola Swan is a partner in Chapman Tripp and Daniel Kalderimis a barrister at Thorndon Chambers.

• Published in the Herald's 2021 Sustainable Business report.