trust law, sustainability, and responsible action

Ecological Economics 31 (1999) 139–154

ANALYSIS

Trust law, sustainability, and responsible action

Antony Scott *Institute for En6ironmental Studies, Uni6ersity of Wisconsin-Madison, 427 Lorch St., Madison, WI 53706, USA

Received 14 October 1998; received in revised form 30 April 1999; accepted 7 May 1999

Abstract

The problem of managing for sustainability is marked by the need to make decisions on behalf of others and bythe uncertainties that attend such decisions. However, the economic literature on sustainability has paid scantattention to how decisions on behalf of others might differ from decisions on behalf of oneself. And, when risk hasbeen modeled explicitly, the expected utility hypothesis has generally been used: a generation acts sustainably if theexpected value of the next generation’s utility is not less than the present’s. This paper investigates how we thinkabout responsibly acting on another’s behalf by looking to the United States law of trusts because in importantrespects the current generation views its responsibility to the future as a trust relationship. Trust law illuminatesresponsible decision making under both risk and uncertainty. Even under conditions of risk more conservative actionthan would be suggested by the expected utility hypothesis is warranted. Because it emphasizes preservation of trustprincipal and disavows profit maximization, trust doctrine indicates that special caution should be exercised inconditions of uncertainty. Finally, resource economic concepts of strong sustainability, the precautionary principle,and the safe minimum standard of conservation are interpreted according to trust principles. © 1999 Elsevier ScienceB.V. All rights reserved.

Keywords: Sustainability; Trust law; Risk; Uncertainty; Decision theory; Expected utility hypothesis

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1. Introduction

The economic literature on sustainability gener-ally presumes that people care about future gener-ations. Sustainability is defined with reference toappropriate intergenerational sharing rules,cashed out in terms of non-declining utility

(Howarth, 1995), utility maintained above someminimal threshold (Chavas, 1993), or some othercriterion (Woodward, 1997). Conditional on thenormative goal, discussion focuses on implica-tions. Scholars investigate whether and in whatform market interventions need to be imple-mented (Howarth and Norgaard, 1990; Pearceand Warford, 1993), and consequences for eco-nomic growth (Solow, 1974), resource manage-ment (d’Arge and Spash, 1991), prices (Howarth* Tel.: +1-608-2623603; fax: +1-608-2624376.

E-mail address: [email protected] (A. Scott)

0921-8009/99/$ - see front matter © 1999 Elsevier Science B.V. All rights reserved.

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A. Scott / Ecological Economics 31 (1999) 139–154140

and Norgaard, 1992), and the like. Invariably,definitions of sustainability affects results (Pezzey,1997).

Partly because different social welfare functionsimply different optimal policies, the sustainabilityliterature has been criticized for lacking intellec-tual grounding (Dasgupta and Maler, 1995). Onwhat basis should one definition of sustainabilitybe preferred to another? Indeed, Pezzey (1997)urges economists to eschew ‘normative philoso-phy’ and engage instead in empirical research toassess what we collectively mean by sustainability.But doing so is problematic.

Individuals often fail to fully live up to theirethical standards. This is not to say that standardsdo not matter; indeed, they affect behavior byproviding a target at which to shoot. But it is acategory mistake to view what people do as ameasure of their ideal for what they should do(Marglin, 1963). Moreover, it is unclear how toaggregate psychological responses from experi-mental settings, as Pezzey (1997) seems to urge, toarrive at the ‘proper’ notion of sustainability.Finally, to some extent individuals seek guidanceabout what constitutes sustainable behavior.

Observing the extent to which governmentsseem actually committed to sustainability, ongrounds that policies of democratic governmentsreflect popular will (Pezzey, 1997), also suffersdifficulties. Sustainability is a relatively recentconcern; institutional frameworks for promotingsustainability are in their infancy, if they exist atall. And it is tempting, but probably incorrect, toview the relatively primitive state of institutionalcommitment as evidence that people in fact donot care. (Olson’s (1971) account of regulatorycapture, for example, hinges upon such a discon-nect.) Further, policy makers may wait for scien-tific opinion to coalesce on the need forsustainability policies. In the case of economicanalysis no such hardening of opinion is possiblewhile different definitions of sustainability areused.

So how does one assess what it is that thecurrent generation means by sustainability? Theapproach taken here gets off the ground by shift-ing focus from sustainability as intergenerationalequity—with its concomitant emphasis on sharing

rules—and attends instead to sustainability asembodying a broader concern for acting responsi-bly towards future generations. Once one askswhat it is to act responsibly on another’s behalf,one can avail oneself of a rich body of empiricaldata; the law of trusts.1

Examining trustee duties can shed light on atleast part of what the current generation views asits responsibility towards the future. Trust lawarticulates a stable and well-established view ofresponsible action on behalf of another. Trustdoctrine has evolved from common law, and sorespects both legal precedent and current norms.In the United States particularly important con-cepts, such as the requisite standard of care fortrustees, were first articulated over 100 years agoand have earned a strong degree of conformityacross jurisdictions. To the extent that institutionscan reflect popular understanding of right action,one might expect trust law to embody a reason-able degree of consensus regarding responsibleaction on behalf of another.

Viewing our obligation to the future in terms oftrust principles boasts further advantages. First,trust law necessarily wrestles with real world com-plications of risk and uncertainty, about whichmany analyses of sustainability abstract. Second,a number of resource economics concepts can beseen to be consistent in spirit with the law ontrusts. Rather than being cut from whole cloth byivory tower scholars, strong sustainability (Com-mon and Perrings, 1992; Howarth, 1997), the safeminimum standard of conservation (Ciriacy-Wantrup, 1952; Bishop, 1978; Randall andFarmer, 1995), and the precautionary principle(Perrings, 1991) re-express established principlesfor making responsible decisions on behalf ofothers.

1 Other areas of the law are also instructive. Living estatesendow current beneficiaries with usafruct rights, and preventthe estate from being sold before final beneficiaries take pos-session. When property rights are so shared the doctrineagainst waste can apply: A may not squander B’s inheritance,even if A is currently using the property. These conceptsarticulate property rights structures that are consistent withsome notions of sustainability. Neither, however, providesprinciples to guide responsible action on behalf of another, asdoes trust law.

A. Scott / Ecological Economics 31 (1999) 139–154 141

This paper presumes that the current generationhas a felt need to act responsibly towards thefuture, shows that this responsibility has beendescribed as a trust relationship, and exploreswhat trust principles require of trustee decisionmaking. Accordingly, the paper’s first section pro-vides evidence that the role of trustee capturesmuch of how we view our obligation to futuregenerations. The second describes the legal stan-dard of care to which trustees should adhere. Thestandard’s implications for intergenerationaltrustee decisions under risk and uncertainty areexplored. The paper’s final section views someeconomic concepts through the lens of trust law.

2. Evidence for the trustee relationship

The role of ‘trustee’ (one charged with manag-ing the affairs of another) is closely related to thatof ‘steward’ (one who engages in active or carefulmanagement). Stewardship, of course, has figuredprominently in many of the most popular andinfluential texts of the environmental movement.In Silent Spring, Carson (1962) urged that wesafeguard our genetic heritage—which we receiveas a gift from the past—for the benefit of futuregenerations. In A Sand County Almanac,Leopold (1949) advocated conservation of whatwilderness that remains, in large part for thefuture’s benefit. Nash (1967), in Wilderness andthe American Mind, identifies a similar ethic as animportant driver of American conservationism.

The legal foundations of trust relationships ex-pressing concern for the future are ancient. Thepublic trust doctrine, which originates in Romanlaw, holds that resources such as waterways andcoastal areas lying below the high water mark areheld in trust by the state. Trustees must managesuch resources for the common good. Because thedoctrine is concerned with ensuring continuedflow of public benefits, it is intimately connectedto intergenerational equity (Brady, 1990; Gray,1996). The doctrine has been used to block pri-vate exploitation that would come at public wel-fare’s expense; it has been applied to city streets,municipal water supplies, prehistoric fossil beds, astate park, a national park, and wetlands (Selvin,1980).

Statutory evidence is widespread that trust con-cepts capture concern for the future. At the inter-national level Maggio (1997) reports that theDeclaration of 1972 United Nations Conferenceof the Human Environment nearly included lan-guage that would have cast concern for futuregenerations in terms of a trust. The SecretaryGeneral’s draft language stated:

‘‘It is the duty of all nations to carefully husbandtheir natural resources and to hold in trust forpresent and future generations the air, water, landsand communities of plants and animals on whichlife depends’’ (Maggio, 1997).

Because some countries felt that it would affecttheir sovereignty the ‘trust’ language was eventu-ally excised. Nevertheless, the draft shows that thetrustee concepts capture what many see as ourobligation to the future. In 1992, according to itsLegal Experts Report, the United Nation Com-mission on Sustainable Development articulated anotion of sustainability that:

‘‘[R]eflected the view that members of the presentgeneration hold the Earth in trust for future gen-erations and at the same time act as beneficiariesentitled to use it for their own benefit’’ (BrownWeiss, 1997).

At the national level, the United States’ Na-tional Environmental Policy Act of 1969 clearlydescribes the current generation’s role as trustee.The Act’s preamble states:

‘‘[I]t is the continuing responsibility of the FederalGovernment to use all practicable means, consis-tent with other essential considerations of na-tional policy, to improve and coordinate Federalplans, functions, programs, and resources to theend that the Nation may fulfill the responsibilitiesof each generation as trustee of the en6ironment forsucceeding generations ’’ [42 U.S.C. 4321, §101 (b)].

Less explicit expressions of the trustee role arein the National Forest Management Act (16USCS §1600), the Wilderness Act (16 USCS§1131), the Wild and Scenic River Act (16 U.S.C.§1271), and the National Park Service’s enablinglegislation (16 U.S.C. §1). They all assert a need tomanage resources for the ‘perpetual’ or ‘unim-paired use and enjoyment’ of the future.


Numerous state statutes describe the future’sinterests as protected by trust. Pennsylvania’sstate constitution provides perhaps the clearestexample:

‘‘Pennsylvania’s public natural resources are thecommon property of all the people, including gen-erations yet to come. As trustee of these resources,the Commonwealth shall conserve and maintainthem for the benefit of all the people’’ (Constitu-tion, Article 1, Section 27).

The Tennessee’s Natural Resources TrustFund, which receives money from exploitation ofnonrenewable resources on state lands, was estab-lished to provide for the ‘long term public inter-est’. Legislation declares that state-ownednon-renewable resources ‘are held by the state intrust for the benefit of future generations’ (Tenn.Code Ann. §11-14-303 (1997)). State legislationcreating nature preserves2 or park lands (Cal PubResources Code §33001; Cal Pub Resources Code§33500) often describe these resources as held ‘intrust for current and future generations’. NewJersey’s Wild and Scenic river program also de-scribes these resources as ‘a public trust’ to beprotected for current and succeeding generations(N.J. Stat. §13; pp. 8–46 (1997)).

3. Care, risk and uncertainty

As trustees for the future we necessarily managean asset portfolio on its behalf. Constitutive in-vestments are subject to either risk or uncertainty.(Here risk refers to prospects that have an objec-tive probability distribution; knowledge of assetperformance is considerable. Investments subjectto uncertainty lack such a distribution). The lawof trusts provides guidance as to responsible ac-tion for both types of assets, and offers insightinto a number of questions: What is permissiblerisk? What research should be performed beforenew investments are made? What kind of track

record should an investment boast before it ispurchased?

Before proceeding, a caveat is in order. Trustsevidence great variety. Trust law reflects this andis, accordingly, voluminous. The treatise ofBogert and Bogert (1993) on trusts contains 22volumes, and that of Scott and Fratcher (1987)occupies 12; both run several thousand pages. Noattempt is made to explore this detail. For ourpurposes two aspects of intergenerational trustsneed to be clarified: what it is that is held in trust,and in what the trust’s main terms consist.

The notion of an intergenerational trust presup-poses that future generations have an endowment.This is in line with work by Bromley (1989), Page(1997), and others, and commits one to viewingsustainability as a constraint rather than a prefer-ence. But a trust framework does not ‘solve’ theproblem of sustainability because it does notspecify what it is that should be held in trust.Those who define sustainability as sur6i6abilitymight view only critical life support services asbelonging to an intergenerational trust. Thosewho view sustainability as equity may favor inter-generational trusts that incorporate all of theearth’s resources.

Brown (1994) argues that government shouldbe in a trustee relationship to its citizenry, anddraws on Locke’s Second Treatise of Governmentto flesh out specific trustee duties. In particular,he urges that as trustees we have a duty tosustainably husband the planet’s full suite of nat-ural resources. In a similar vein, Page (1983)distinguishes between comparative intergenera-tional utility and intergenerational justice, andappeals to our intuitions about the latter to arguefor the need to preserve the earth’s natural re-sources. In contrast, because I draw on trustlaw — which admits trusts of various composi-tion — my main aim here is necessarily moremodest: to investigate responsible management ofthe future’s portfolio once the trust has beenspecified. Because trust principles lend insight intoresponsible decision making whether one viewsthe trust as encompassing the whole or only apart of the planet’s resources, for now I leaveopen the question of responsible determination ofinitial portfolio content.

2 Delaware: 7 Dell C. §7308 (1997); Georgia: O.C.G.A.§12-3-76 (1997); Illinois: 525 ILCS 30/14 (1997); Indiana:Burns Ind. Code Ann. §14-31-1-7 (1998); Kentucky: KRS§146.440.


As to trust terms the approach here, as withmost trusts, is to assume that current-day benefi-ciaries are entitled to trust income while principalis held for future beneficiaries. This is consistentwith the literature on Hicksian income (Repetto etal., 1989; El Serafy, 1991; Pearce and Atkinson,1995). Because the role of trustee requires attend-ing to the interests of all beneficiaries, the fact thatthe current generation is both beneficiary andtrustee does not entail schizophrenic conflict: ascommitted trustees we simply reject the temptationto steal.

3.1. The trustee standard of care

A few states provide statutory lists to guideinvestment decisions (Bogert, 1987). However, listshave generally given way to the ‘prudent investorrule’ because the rule’s flexibility enables it tobetter reflect what constitutes a reasonable invest-ment given changing conditions. As the Massa-chusetts Supreme Court has stated, the rule:

‘‘[I]s comprehensive and remains fixed. It is notbound to particular classifications of securities,but continues as a safe guide under changed finan-cial institutions and business customs, usages andinvestment combinations’’. (Springfield Safe De-posit and Trust Company vs. First UnitarianSociety, 293 Mass. 480; 200 N.E. 541; Mass. 545).

The rule for trustee investments is the same asthe ‘standard of care’ for determining whethertrustee acts more generally have responsibly beenperformed. While trust law varies between states,the standard of care is uniform. Both statute andcase law require trustees to:

‘‘Manifest the care, skill, prudence, and diligenceof an ordinary prudent man engaged in similarbusiness affairs’’ (Bogert and Bogert, 1993; §541;p.167).

In what follows we unpack the law’s meaning ofthe two key phrases ‘ordinary prudent man’ and‘similar business affairs’.

3.1.1. ‘Ordinary prudent man’In referencing ‘ordinary’ prudent men the stan-

dard of care invokes the degree of skill exercised

by a community of ‘prudent men’. The standard isthus objective. Courts do not look to what aparticular trustee would consider to be prudent(Litchfield vs. White, 1852,7 N.Y. 438, 443, 57Am. Dec. 534). It is not enough for a trustee toshow that he used the same skill and prudence inmanaging the trust as he employs in his ownbusiness (Bogert, 1987; §93; p. 335). Nor can atrustee be excused for negligent actions simplybecause he personally lacked skill to do better(Ashley vs. Winkley, 1911, 95 N.W. 932,209 Mass.509; Newman vs. Shreve, 1910, 78 A. 79 229 Pa.200), or because he was otherwise well intentioned(Bogert and Bogert, 1993; p. 177).3

Increasingly, the ‘ordinary prudent man’ stan-dard functions as a floor for responsible trusteeactions (Bogert and Bogert, 1993; §541; p. 180).Fiduciaries with greater knowledge or skill have aduty to use it (Bogert, 1987; p. 335). The Minne-sota legislature has determined that:

‘‘If the trustee has special skills or expertise or ifthe trustee holds itself out as having special skillsor expertise, the trustee is under a duty to usethose skills or expertise’’ (Minn. S.A. §501.125Subd. 1).

Similar laws have been passed in many otherstates;4 the Uniform Probate Code (§7-302) ex-presses a comparable standard.5 Courts, too, haveheld that trustees with greater skill have a duty touse it.6 The Kentucky Supreme Court explainsthat:

3 The standard would thus discount arguments of privateproperly owners who complained that environmental regula-tions—which prima facie reflect community standards ofcare—are more stringent than what they would wish for toprotect their own children.

4 See: Florida: West’s Fla. S.A. §737.302; Michigan: Mich.Comp. L.A. §700.813; Nebraska: Neb.RS. §24601; New Jersey:N.J.S.A. 3B:20-13; New York: McKinney’s EPTL 11-2(a)(1).

5 Bogert (1987) reports that Alaska, Arizona, Florida,Maine, Michigan, Nebraska, New Mexico, North and SouthDakota, and Utah have adopted the Uniform Probate Code.

6 Hawaii: Steiner vs. Hawaiian Trust Co., 393 p 2d 96, 47Hawaii 548; New Jersey: Liberty Title and Trust Co. vs. Plews,60 A.2d 630, 142 N.J. Eq. 493, opinion supplemented 61 A.2d297, 142 N.J. Eq. 632, modified on other grounds, 70 A.2d784, 6 N.J. Super. 196, affirmed except as to counsel fees 77A.2d 219, 6 N.J. 28.


‘‘[I]f the trustee has greater skill than that of a manof ordinary prudence, he is under a duty to exercisesuch skill as he has.’’ (Germania Safety Vault andTrust vs. Driskill, Ky., 66 S. W. 610, 23 Ky. LawRep. 2050).

Failure to do so exposes the skilled fiduciary toliability for loss. In re Estate of Lychos (470 A.2d136, 323 Pa. Super. 74), co-trustees were there heldto different standards for not insuring a buildingagainst fire because one was a bank (with greaterexpertise) while the other the son of the testator(merely an ‘ordinary’ prudent person).

Trustees, both skilled and ordinary, must bothsolicit expert advice and use reasonable care toensure that the advice is sound (Bogert and Bogert,1993; §541; p. 171). Kentucky’s Supreme Court, forexample, has stated that trustees need to conscien-tiously solicit advice:

‘‘The Trust Company cannot rely upon the generalreputation of the solvency of the corporation orthe worth of its securities as a good investmentbecause it had the means at hand coupled with theduty to ascertain its actual value’’ (GermaniaSafety Vault and Trust Co. vs. Driskell, 66 S. W.610, 612, 23 Ky. Law Rep. 2050).

Alabama’s Court ruled a professional trusteeliable for losses because investments had beeninsufficiently researched (First Alabama Bank ofMontgomery, N.A. vs. Martin, Ala. 1982, 425So.2d 415, certiorari denied 1983, 103 S.Ct. 2109,461 U.S. 938, 77 L.Ed.2d 313). The need to doresearch also pertains to investments currentlyheld. A trustee cannot assume that investments hehas received will continue to be proper (Bogert,1987; p. 391); rather, trustees must regularly mon-itor investments (John vs. Herbert, 2 App.D.C.485).

This indicates that the present generation maybe obliged to regularly update its informationregarding threats to the future’s endowment. Re-search money to permit regular review of the stockof natural capital, and threats to it, may need tobe allocated (Brown Weiss, 1989; p. 68). Suchresearch would be easily married with the duty oftrustees to keep good records and proper accountof trust property (Estate of McCabe, 87 Cal. App.

2d 430; Benbow vs. Benbow, 117 Fla. 37, 157 So.512). As explained by Wisconsin’s Supreme Court:‘‘A trustee is not handling his own funds but fundsof others and he must always be able to make a fullaccounting of his stewardship’’ (estate of Martinvs. Barry, 39 Wis. 2d 437; 159 N.W.2d 660).

Hence, agents of the intergenerational trustshould draw on the skill and prudence availablewithin the collective. While democratic imperativespreclude turning resource management decisionsover to ‘experts’, special consideration may need tobe given to those with special skill. At minimum,the greater responsibility of those with expert skillssuggests an extra measure of caution when makingdecisions that affect the future.

The duty to prudently apply expertise suggestsalso that intergenerational trustees cannot usescientific dissent as an excuse to avoid action whena reasonable degree of scientific consensus has beenachieved. Given the skeptical nature of scientificenquiry, there will always be those who remainunconvinced. However, intergenerational trusteeshave a duty to exercise the judgment of a reason-able person in evaluating the soundness of scien-tific opinions proffered.

3.1.2. ‘Engaged in similar affairs’The standard of care for trustees is benchmarked

not just to the conduct of ‘ordinary prudent men’.Prudence, rather, is to be measured against thecommunity of people ‘engaged in similar affairs’ asthe trustee (Scott and Fratcher, 1987; Bogert andBogert, 1993). This is not as circular as it sounds:being a trustee involves making decisions on behalfof others.

‘‘The duty of a trustee is not to take such careonly as a prudent man would take if he had onlyhimself to consider; the duty rather is to take suchcare as an ordinary prudent man would take if hewere minded to make an investment for the benefitof other people for whom he felt morally bound toprovide’’ (In re Whiteley, 1875, 33 Ch. Div. 347,355).

This standard is widely sited (e.g. Reiley vs.Healey, 122 Conn. 64, 187 A. 661). The UniformProbate Code similarly asserts that ‘‘The trusteeshall observe the standards in dealing with the trustassets that would be observed by a prudent


man dealing with the property of another’’ (Unif.Prob. Code §7-302). Other states have adopted asimilar standard by statute.7 But, from the per-spective of care, what does it mean to makedecisions for others?

Trust principles suggest that decisions on behalfof others require a greater degree of risk aversionthan employed when conducting one’s own af-fairs. Bogert and Bogert (1993) explain that ‘‘Atrustee . . . would not satisfy the court by showingmerely that prudence which a business man wouldexercise in trade or speculation’ (§541; p. 174).The New Hampshire Supreme Court held thattrustees must be particularly cautious in theirinvestments, saying that trustees:

‘‘[M]ust use the caution of one who has primarilyin view the preservation of the estate entrusted tohim, a caution which may be greater than that ofa prudent man who is dealing with his own prop-erty . . . The trustee must exercise the care andskill of a prudent person in conserving the prop-erty, rather than the care and skill of a person ofordinary prudence’’. (Miller vs. Pender, 1943, 34,A.2d. 663, 665, 93 N.H. 1, 150 A.L.R. 798).

Pennsylvania’s Supreme Court put it even moresuccinctly: ‘‘The primary duty of a trustee is thepreservation of the assets of the trust and thesafety of the trust principal’’ [in re Flagg’s Estate,365 Pa. 82, 91, 73 A.2d 411, 416 (1950)]. Similarlanguage can be found in statute in the vastmajority of states (Bogert, 1987; § 106; p. 386).

3.2. In6estments under risk

The foregoing brings us to one of this paper’scentral points: trustees have no obligation to max-imize the expected value of trust assets (Bogert,1987; §106; p. 387). Given the duty to preservetrust principal, trustees must indeed refrain frommaximizing expected utility. This stands in starkcontrast to the approach usually found in formalmodels that address sustainability under condi-tions of risk (Asheim and Brekke, 1993; Howarth,

1995; Woodward, 1997). In such models, a gener-ation acts sustainably if it manages affairs so thatthe next generation’s expected value (or expectedconsumption, or expected utility) is not less thanthe present’s.

The problem with expected utility models arisesnot simply because intergenerational decisionmaking involves uncertainty (where at best onlysubjective probabilities can be assigned) ratherthan risk (where agents possess an objective prob-ability distribution over outcomes and an objec-tive expectation can be taken).8 Rather, theexpected utility framework importantly fails tocapture how we actually think about responsiblyacting towards others. Trust principles suggeststhat, if this generation has an ethical responsibil-ity to the next, then decisions that rely on centraltendencies will not adequately discharge moralduties. Decisions on behalf of others warrantmore conservative action; ‘average’ outcomes arenot good enough. Trustees must use more cautionthan were they to act simply for their own benefit(where they presumably would try to maximizeexpected utility).

Both courts and statutes have given specificadvice about what constitutes prudent safeguard-ing of trust principal. United States bonds andother obligations guaranteed by the federal gov-ernment are generally considered the safest invest-ments that one can make and are invariablyapproved as legal trust investments (Bogert, 1987;§104; p. 374). State and municipal bonds are alsovery highly considered, unless there has been arecent default. Because land values are generallyfairly stable first mortgages are usually consideredhighly, so long as the debt secured does notexceed too high a fraction of the mortgaged land’sworth (Bogert, 1987; §104; p. 374). Bonds ofpublic utilities and industrial corporations are

8 Many have criticised the expected utility hypothesis ongrounds that managing for sustainability involves uncertaintyrather than risk, see Faber et al., 1992; Faucheux and Froger,1995; Howarth, 1997. While such criticisms are apt, neverthe-less, formal modeling can provide insight. (Against this claimsee Bromley (1998)). Further, sustainability modeling thataddresses risk is an advance over the deterministic efforts thatmake up the larger part of the neoclassical sustainabilityliterature.

7 See, e.g.: Hawaii: RL.H. §406-22(a); Missouri: V.A.M.A.§456.500(1); New Jersey: N.J.S.A. 3B:20-13; North Carolina:G.S. §36A-2; Washington: West’s R.C. WashA. 11.100.020.


also commonly found on legal lists (Bogert, 1987;§104; p. 375). Common stocks, too, can be prudentso long as they are viewed as safe, and possesssufficient track record to justify such judgement.The Massachusetts State Supreme Court has deter-mined that stocks will be considered prudent when:

‘‘[C]orporations have acquired by reason of theamount of their property, and the prudent man-agement of their affairs, such a reputation thatcautious and intelligent persons commonly investtheir own money in such stocks and bonds aspermanent investments’’ (Dickinson, 152 Mass.184, 25 N.W. 99, 9 L.R.A. 279).

The lesson is that safe investments are thehallmark of prudent fiduciary efforts.

Of course, acting as fiduciary does not preventthe current generation from making investmentsthat carry some degree of risk. Indeed, trusteeshave a duty not to be so risk averse that assets areallowed to lose value. Trustees can be held liablefor holding investments that yield little or noincome, or whose value has significantly andsteadily declined (Dickerson vs. Camden TrustCo., 1 N.J. 459, 64 A.2d 214). In consequence,trustees generally have implied power and duty toreview and change investments (Spencer vs. Weber,163 N.Y. 493, 57 N.E. 753); they do not have aduty to maintain the exact composition of a trustportfolio.

A mean-variance utility framework can lendinsight. In mean-variance schemes U%(wealth)\0,U%(6ariance)B0, U%%(wealth)B0 and U%(6ariance)B0. Agents will be indifferent between portfolioswith low average yields and low variance andportfolios with higher yields and larger variance.Part of the difference between investment decisionsmade by a trustee acting on her own behalf, andacting on behalf of trust beneficiaries, is that forany mean return the trust investment has a lowerdegree of acceptable variance (Fig. 1).

But a trustee’s objective function is distinguishedby more than greater risk aversion. The MichiganSupreme Court reminds us that trustees:

‘‘[M]ust always bear in mind that the primaryobject of the creation of the trust is not, ordinarily,accumulation but the preservation and perpetuity

of the fund until the time for its distributionarrives’’ (In re Buhl’s Estate, 211 Mich. 124, 178N.W. 651, 12 A.L.R. 569).

Alabama’s Supreme Court also defines prudentbehavior in terms of safeguarding trust principal:

‘‘[O]ne who buys common stocks with the idea ofselling them on the market for higher prices isspeculating. One who is making a prudent invest-ment examines the stocks’ intrinsic values andpurchases them for a long-term investment’’ (FirstAlabama Bank of Montgomery, N.A. vs. Martin,Ala. 1982, 425 So.2d 415, certiorari denied 1983,103 S.Ct. 2109, 461 U.S. 938, 77 L.Ed.2d 313).

Thus, the purpose for which assets are pur-chased is different than that suggested by a mean-variance framework. While gains are welcome,trustees should not view gains and losses to thetrust in symmetric fashion, as traditional economictheory would suggest. Such asymmetry is reminis-cent of prospect theory (Kahneman and Tversky,1979).

The special attention given to the preservationof trust principal is echoed in trust law’s require-ments for profit reinvestment. When a normalinvestor makes a profit, the fraction taken incurrent consumption reflects the investor’s per-sonal discount rate and estimate of future capitalproductivity. However, the full portion of profitsrealized from converting trust assets must be rein-vested; current beneficiaries are entitled only todividends (In Stewart vs. Phelps, 71 App. Div. 91,75 N. Y. Supp. 526; In the Matter of Gerry, 103N.Y. 445, 9 N. E. 235). This reinvestment require-

Fig. 1. Mean–variance portfolio acceptance curves.


ment reflects the weight given to protecting trustprincipal. For intergenerational trusts it suggestsalso that the current generation must not ‘cash in’natural capital and assume that future investmentswill generate enough profit to leave the futurebetter off. Profits from asset liquidation must befully reinvested.

To insist that intergenerational trustees have aduty to invest more conservatively on behalf of thefuture is not to say that the next generation willhave a greater degree of risk aversion than doesour own. The lower curve of Fig. 1 is not anindifference curve; it describes ‘acceptable invest-ments’. Instead, trust law holds that decisions forothers need to be made with greater risk aversionthan those that we make for ourselves. This sug-gests, as discussed by Sen (1977, 1997), that choicesare sometimes judged not only by the outcomesthat they generate but also by the choice act itself.Who does the choosing can matter a great deal.

When fiduciary in nature, well-meaning peopleoften make decisions that are quite different fromthose that they would otherwise make—even indeterministic cases. A stylized example from Frisch(1971) is reported in Sen (1997) and paraphrasedas follows:

A husband and wife are eating dinner together.Two cakes have been purchased for dessert. Theyare very different, but both known to be excellent.The wife hands the husband the tray and asks himto help himself. The husband knows which cake hewould select for himself were he alone in a bakeryshop, but for him the relevant question is: whichof the two cakes would his wife prefer? If he knows,he selects for himself the other cake; his ownpreferences are completely irrelevant to the choice.

No doubt we have all been in similar situations,and made choices based on similar concerns.

Making choices in this manner need not openone to charges of irrationality. It is simply to assertthat the relevant description (and hence utility) ofa prospect may involve not just its ‘monetary’payoff, but also who is making the choice. Indeed,neoclassical theory lacks normative grounds forasserting that chooser dependence should not enterone’s utility function (Sen, 1982). Similar argu-ments have been made for including potential

regret or rejoicing into evaluation of the utility ofacts over uncertain prospects (Loomes and Sug-den, 1984, 1987).

3.3. In6estments under uncertainty

Trustees must make investments in which risksare well understood, such that a prudent personwho invests for the permanent disposition of fundswould make them. While investing in corporatestock is often prudent, ‘seasoned issues will natu-rally be preferred to securities of new enterprises’(Bogert, 1987; p. 388; citing Aydelott vs. Breeding,111 Ky. 847, 64 S.W. 916). The Michigan StateSupreme Court has defined when common stocksmight be considered prudent:

‘‘A reasonable investment in dividend-payingstocks. . . of a private business corporation may bepermitted when the corporation has acquired, byreason of the amount of its property and theprudent management of its affairs for a consider-able period of time, such a reputation for perma-nence and stability as to command universalconfidence, and so that careful and intelligentpersons, familiar with such corporations and themanner in which their business should be con-ducted, commonly invest their own money in themas a permanent investment’’ (in re Buhl’s Estate,211 Mich. 124, 178 N.W. 651, 12 A.L.R. 569).

In contrast, an investment in penny stocks wouldnot be considered prudent (Sartore vs. Buder,Colo. App. 1988, 759 P.2d 785, decision affirmed1989, 774 P.2d 1383).

This suggests that trustees may acceptably investin appropriate risky assets (i.e. assets for which aprobability distribution over outcomes is available,and for which risks are not too great). However,investments for which losses are plausible andprobabilities over outcomes are unknown (e.g.penny stocks) should be avoided. With regard tosustainability trusts, the current generation shouldtry to ensure that the new investments made onbehalf of future generations command ‘universalconfidence’.

In particular, if a given stock of renewablenatural capital is part of the intergenerationaltrust, then the current generation as trustee


should perhaps avoid converting such an assetinto other forms of capital. (Again, I avoid thequestion of the preferred constituents of an inter-generational trust; the discussion here focuses onresponsible trustee action gi6en a portfolio). Wedo not know the potential gains and losses associ-ated with ecosystem conversion. Indeed, we gener-ally do not have good information about thevalue of current day benefits generated by naturalcapital. Further, we cannot convincingly assignprobabilities to possible outcomes of convertingnatural capital; benefits (and their continued flow)generated by ecosystem liquidation depends onmany contingencies. However, with proper pro-tection ecosystems are very likely to continue toprovide the goods and services that they nowgenerate. Given that trustees have no obligationto maximize the welfare of future generations, acase can be made for conserving what naturalcapital is initially part of the trust.

For example, as trustees the current generationmight well be advised to take swift action tocurtail greenhouse gas emissions. The current cli-mate might well be viewed as an asset that is heldin trust; economic and social systems have beenoptimized around current climate parameters. Ex-isting (let alone increasing) emissions of green-house gasses have potential to put that asset atrisk, and there is not consensus among knowl-edgeable and prudent people as to the likely ef-fects of a significantly warmer climate. Thus,benefits for future generations of pursuing ‘busi-ness as usual’ appear speculative, while costs ofemissions reductions (and concomitant benefits ofpreserving the current climate) are comparativelywell understood.

Trust principles do not suggest that naturalsystems that comprise part of the future’s initialendowment should never be altered or converted.The history of trust investment in equities is in-structive. Over a 100 years ago, the stock marketwas considered insufficiently tested and viewed asan unreliable repository for trust investments(Bogert, 1987). High Courts (e.g. Tucker vs. State,72 Ind. 242; Kimball vs. Reding, 31 N.H. 352, 64Am.Dec.333; King vs. Talbot, 40 N.Y. 76) andsome statutes (e.g. Ala. Constitution, Art. 4, §74)forbade prudent trustees from investing in com-

mon stocks. As experience with the stock marketwas gained, and as equity markets became lessspeculative, prohibitions were relaxed. Stocks be-came ‘prudent’ once they had developed a suffi-cient track record to enjoy considerableconfidence. Today roughly half of all trust invest-ments managed by corporate fiduciaries areplaced in common or preferred equity.9 The up-shot is that as more knowledge of natural systemsis gained so too does the possible latitude formaking new trust investments that require con-verting natural capital.

The foregoing addresses how responsibletrustees should make new investments, assumingthat the future’s initial endowment consists of acertain amount of natural capital. No assumptionis made about the substitutability of natural forhuman-produced capital. Rather, the point is tosuggest what constitutes responsible decisionmaking gi6en uncertainty about substitutability.Of course, nothing prevents us from prudentlymaintaining the future’s natural capital stock onlyto leave the future with assets that it turns out tonot very much want. We may well make mistakes;as responsible trustees, however, we want to makemorally excusable ones.

4. Trust law and economic concepts

We now have sufficient background to re-inter-pret economic concepts that are also concernedwith decision making under uncertainty: so-called‘strong sustainability’ (Common and Perrings,1992; Howarth, 1997), the precautionary principle(Perrings, 1991), and the safe minimum standardof conservation (Ciriacy-Wantrup, 1952; Bishop,1978; Randall and Farmer, 1995). In what fol-lows, these notions are shown to be largely consis-tent with trustee duties.

9 Of investment over which trustee discretion was permitted,in 1996 50.3% was in common and preferred stock; 19.7% ingovernment bonds; 15.6% in money market and other short-term investment funds; 6.7% in interest-bearing bank deposits.Other notes and bonds, real estate, and miscellaneous assetsmade up the rest. Data from the Federal Deposit InsuranceCorporation; see http://www.fdic.gov/consumer/structur/trust/index.html.


4.1. Strong sustainability: structured endowmentsand portfolio di6ersity

Proponents of ‘strong sustainability’ urge thatthe total stock of natural capital be nondeclining(Daly and Cobb, 1989). This view is motivatedby uncertainty about how ecosystems functionand the possibility of non-linear breakpoints andirreversibilities. In the present context, propo-nents of strong sustainability can be seen as ad-vocating a particular make up of theintergenerational trust, viz. a structured endow-ment consisting (in part) of no less than theextant quantity of natural capital (Norton, 1995;Howarth, 1997). While strong sustainability hasbeen attacked on efficiency grounds, trust doc-trine offers some support.

First, one can apply the reasoning from theprevious section—on decision making under un-certainty gi6en an initial trust endowment—tothe current concern of endowment specification.We know that current welfare depends in somemeasure on natural capital. Assuming that futuregenerations can get by with less (or none) iscomparatively speculative, as the assumption de-pends on unrestricted substitutability betweennatural and human-made capital—a substi-tutability that is subject to considerable uncer-tainty. Hence, because uncertainty surrounds thelevel of natural capital that is necessary to main-tain even basic life support services, a conserva-tive approach to structuring the endowment offuture generations seems warranted.

Second, the prudent investor rule tends to ap-ply to a trustee’s portfolio as a whole. The Mas-sachusetts Supreme Court has held that afiduciary should minimize risk to trust principalby diversifying investments, if trust terms will soallow:

‘‘In the absence of authority or direction in thewill to retain investments made by the testator, itis ordinarily prudent for a trustee to diversify hisinvestments, following the proverbial injunctionnot to put all one’s eggs in one basket.’’ (Kim-ball vs. Whitney, 233 Mass. 321, 331, 332, 123N.E. 665).

And the Hawaii Supreme Court has urged

that:

‘‘Under the broad duty to act as a ‘reasonablyprudent businessman’ it is the specific invest-ment duty of a trustee to diversify trust invest-ments unless absolved from so doing by expressdirection in the trust instrument’’ (Steiner vs.Hawaiian Trust, 393 P. 2d 96, 47 Hawaii 548,(1964)).10

Duty to diversify investments is especially ap-plicable for trustees making new investments;lack of diversity in investments received from thetrust settlor tend to be less critically viewed bythe courts (Central Hanover Bank and Trust vs.Clark et al., 81 N.Y.S.2d 883).

Trust doctrine tends to value portfolio diver-sity as a bulwark against risk and uncertainty.The ‘rivet popping’ fable of Ehrlich and Ehrlich(1981) suggests that in continuing to convert nat-ural into human-made capital, the portfolio heldin trust gradually loses diversity and becomesvulnerable to catastrophe. In constituting the in-tergenerational trust, then, proponents of so-called ‘strong sustainability’ can be viewed asarguing for a diverse portfolio structure.

4.2. The precautionary principle

The precautionary principle has been offered asa way to reasonably contend with problems inwhich the environmental cost of economic activityis highly uncertain, potentially catastrophic, wide-spread, and possibly irreversible (Perrings, 1991).Global warming is an illustrative example. Theprecautionary principle ‘‘requires the commitmentof resources now to safeguard against the poten-tially catastrophic future effects of current activ-ity’’ (Perrings, 1991; p. 160). Policies are evaluatedwith reference to worst-case extremes, rather thanby a probabilistic weighting of such events, be-cause decision makers lack reasonable groundsfor assigning probabilities. Although the parallels

10 See also: California: Mandel vs. Cemetery Board, 185Cal. App. 2d 583, 8 Cal. Rptr. 342; Illinois: in re Sanders, 304Ill App. 57, 25 N.E.2d 923; New Jersey: in re Ward, 121 N.J.Eq. 555, 192 Atl. 68, aff’d in 121 N.J. Eq. 606, 191 Atl. 772;Tennessee: Knox County vs. Fourth and First Nat. Bank, 181Tenn. 569, 182 S.W.2d 980.


are imperfect, the legal regime on trusts can beseen as providing support for the precautionaryprinciple in several ways.

First, the precautionary principle and the law oftrusts take a similar view of the asymmetric im-portance of gains and losses. The precautionaryprinciple applies when decisions are importantlyguided by a societal objective function wherelosses with respect to uncertain outcomes shouldbe minimized. Similarly, fiduciaries are chargedwith making decisions that safeguard trust princi-pal. As such, they make decisions first with an eyetowards preventing capital loss. Both trust lawand the precautionary principle are therefore con-cerned not with maximizing welfare but with pro-tecting against bad outcomes.

Second, the precautionary principle and trustlaw similarly treat responsible handling of ‘worstcase’ scenarios. The ‘worst case’ effects consideredby the precautionary principle are determined notby what one can conceive, but rather by thedegree of surprise or disbelief associated withpossible outcomes. Catastrophic but scarcely be-lievable outcomes are ignored in precautionaryprinciple decisions, while very unlikely Chernobyl-style accidents can become the focus of decisionsbecause they are believable (Perrings, 1991; p.161).

Such bounding of the state space may at firstappear ad hoc but accords with criteria used byprudent fiduciaries. Liability for failing to safe-guard trust assets can be found only for eventsthat are sufficiently ‘believable’, where ‘believabil-ity’ is determined by a community of reasonablepeople. Connecticut’s Supreme Court explained:‘‘It is today a general custom among prudent busi-ness men to insure buildings in their chargeagainst loss by fire; and ordinarily it is the duty oftrustees holding property. . . to see that such pro-vision is made’’ (Willis vs. Hendry, 127 Conn.653, 20 A.2d 375). Once care has been exercised inselecting an insurer, a trustee cannot be held liablefor the scarcely foreseeable loss caused by simul-taneous occurrence of both fire and insurancecompany failure (Getting vs. Scudder, 71 Ill. 86).

Finally, the precautionary principle and trustlaw handle information about uncertain (as op-posed to risky) events in much the same way. The

precautionary principle adopts a minimax criteria(minimizing maximum loss) only with regard touncertain events. As conditions of uncertaintygradually become conditions of risk, policy evalu-ation shifts from a minimax framework to onewhere expected losses are calculated. The prudentinvestor rule reflects much the same distinction.The history of common equity investments in thestock market reflects this. Once-eschewed invest-ments can take on the patina of ‘prudence’ asexperience is gained.

4.3. The safe minimum standard of conser6ation

The safe minimum standard (SMS) suggeststhat policy makers avoid exploiting natural re-sources to levels below which economically irre-versible degradation takes place(Ciriacy-Wantrup, 1952; Bishop, 1978; Randalland Farmer, 1995). The concern is that irreplace-able natural resources—either singly or in net-work—may later prove highly valuable. The SMSis often thought relevant to unique natural assetssuch as species, undisturbed ecosystems, and thelike. While seeking to avoid large future losses,the SMS is not completely inflexible. If current-day costs of avoiding critical levels of exploitationare ‘intolerably high’, then the SMS suggests thatexploitation should proceed (Randall and Farmer,1995; p. 34).

Like the precautionary principle, the SMS con-cerns situations marked by uncertainty ratherthan risk. However, the SMS appears to havesomewhat wider applicability than does the pre-cautionary principle; as it is not directed onlytowards avoiding ‘catastrophic’ loss. And, ratherthan assuming that human capital can substitutefor natural capital, as the precautionary principleseems to do, the SMS suggests protecting theendangered resource itself.

The SMS has been attacked on efficiencygrounds: why should uncertain future benefitstrump certain costs? Trust law offers two re-sponses. First, the current generation has an obli-gation to protect the value of beneficiaryprincipal; there is no duty to maximize beneficiarybenefits. Thus, efficiency arguments—which arebased on the notion of maximizing expected


benefits—do not hold sway in the context of atrust relationship. The second point derives fromthe first: trustees should not speculate with trustprincipal. Given the self-sustaining nature of bio-logical populations and ecosystems, SMS propo-nents could argue that converting natural tohuman-created capital without leaving opportuni-ties to rebuild natural stocks is speculative.

Others protest that the SMS fails to providecriteria for determining when preservation costsare ‘intolerably high’. Trust principles offer somedefence. For intergenerational trusts that do notsubsume the planet’s entire resource base, onemight distinguish whether ‘unacceptable’ costs areto be borne by current or by future generations.With regard to the former, trustees are not re-quired to impoverish themselves to preserve trustassets (Kile vs. Forman, 113 W. Va. 313, 167 S.E.744; McClure vs. Middletown Trust Company, 95Conn. 148, 110 A. 838; Halstead’s Executors vs.Ingram, 163 Va. 223; 175 S.E. 898). That is, fromthe perspective of trust law, the SMS need notrequire that the current generation dip into itsown endowment to preserve the future’s naturalcapital. From this perspective, therefore, the SMSmight impose ‘unacceptably high’ costs if thosecosts are to be paid out of the current genera-tion’s endowment.

The relevant question regarding ‘intolerablyhigh’ costs would then concern whether costs areunacceptably high for future generations them-sel6es. That is, costs would be ‘unacceptable’ ifthe SMS would require trustees to expend anunreasonable portion of future generation princi-pal to maintain another component of that princi-pal. Such a standard is similar in spirit to calls forefficient sustainability (Woodward and Bishop,1995).

Suppose, however, that the costs of maintainingthe endowment of future generations imposes seri-ous suffering on the present—a problem relevantto trusts that encompass either the whole or onlya part of the planet’s resources. The SMS notionof ‘intolerable costs’ seems to have been intendedto cover such situations, and accordingly wouldstill appear vulnerable. But the law of trusts offerssome support here also. It is hard to imagine asituation in which the current generation would

be subject to intolerable suffering that wouldnot—if unalleviated—threaten trust principal.11

In such circumstances, the law of trusts imposes aduty to expend trust funds to protect trust prop-erty (Scott and Fratcher, 1987; §176); thus, courtsmay authorize a trustee to sell part of the trustestate to raise funds to pay a mortgage andprevent foreclosure (Rothwell vs. Rothwell, 283Mass. 563, 186 N.W. 662). In the intergenera-tional context, how much trust principal wouldneed to be liquidated would be a matter of pru-dent judgement. The law on trusts does notprovide rules for determining prudence becausesuch rules would invariably bump against unfore-seen contingencies. The SMS relies on similarcommunity standards of reasonableness.

5. Conclusion

Why is it that we often think of our responsibil-ity to future generations in terms of an intergener-ational trust? Part of the attraction may be thattrusts provide a mechanism to ensure adequateconsideration of our children’s interests. Trustsoffer institutional support to prevent us fromunthinkingly ‘eating’ more than our share of theearth’s resources. Further, trust law provides adegree of practical guidance in real-world decisionmaking. The notion of optimal intergenerationalallocations requires a set of heroic assumptions:the preferences of future generations, the rate oftechnological change, the responses of ecosystemsto as yet unknown disturbances. While insight hasbeen gained from models that evidence such hero-ism, such exercises suffer a degree of unreality. Incontrast, those who set up trusts make no pre-tence of optimality ; they try merely to act respon-sibly towards trust beneficiaries.

11 Such cases are, of course, conceivable. It is here that theanalogy between trust law and sustainability perhaps breaksdown. The SMS’s notion of ‘unacceptable’ implies an act ofmoral balancing. While legal institutions often employ balanc-ing tests (and rely on community standards of reasonablenessto do so), the law of trusts does not seem to offer precedentfor raiding one beneficiary’s benefit stream simply becauseanother beneficiary is in ‘dire need’. The practical reasons forthis are clear.


For intragenerational trusts an abuse oftrustee discretion (according to ‘ordinary prudentman’ standards) would allow the beneficiary tosuccessfully sue for damages. Such remedies areclearly not available in an intergenerational set-ting. To the extent that our responsibility to thefuture is captured by a trustee relationship, apremium must be placed on designing institu-tions that produce management decisions thatconform to the ‘ordinary prudent man’ standard.There is need for mechanisms to ensure thatnatural resource agency administrators, for ex-ample, do not make decisions that violate trustprinciples.

Current natural resource agencies in theUnited States are probably not up to the task.Courts currently serve as a venue for citizens tocomplain about agency decisions. However,courts will overturn a management decision onlyif it can be shown that the agency’s choice is‘arbitrary and capricious’. This is a very narrowstandard. In contrast, aggrieved trust beneficia-ries need only show that trustees had failed toact as would an ‘ordinary prudent man’. Institu-tional innovation may be required to resolvesuch problems if we are to treat our responsibil-ity to future generations in terms of a trustee-ship. Simple extensions of current agency dutiesmay not suffice.

For the current generation to discharge itsfiduciary obligation it cannot rely on the expec-tation that a series of risky short-term invest-ments will generate enough profit to leave futuregenerations as well off as is the current genera-tion. And, in contrast to those who urge that thecurrent generation is likely to most benefit thefuture by maximizing its own utility, trust princi-ples suggest that—even were this the case—at-tending to likelihoods is irrelevant. As fiduciarythe current generation has a duty first to hus-band the capital that the future will inherit.

Real-world problems of sustainability are char-acterized by making decisions on behalf of oth-ers, and by great uncertainty as to theconsequences of those decisions. Strikingly, muchof the economic literature on sustainability hasaddressed neither concern. As it turns out, the

law on trusts necessarily wrestles with them bothand provides a ready springboard for inquiry.

Acknowledgements

Both content and exposition have benefitedfrom reviews by Richard Bishop, Daniel Brom-ley, Marcos Castillo, Brian Norton, Basil Stum-borg and Richard Woodward, and ananonymous referee. I am especially indebted toAnne Applegate Scott, Esq., for help with legalresearch and analysis. This work is funded bythe University of Wisconsin Sea Grant Instituteunder grants from the National Sea Grant Col-lege Program, United States Department ofCommerce, and from the State of Wisconsin.Federal grant NA46RG048 1, project R/PS-46.

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