How to Use Trusts for Impact Investing and Social Enterprise Support

Hong Kong’s private wealth sector is undergoing a structural recalibration. The SFC’s September 2025 circular on the licensing of family offices (SFC Circular, 12 September 2025, Ref: SFO/IS/058/2025) explicitly clarified that single-family offices managing external assets above HKD 8 billion must now apply for Type 9 (asset management) licences unless they meet the “wholly-owned” exemption. This regulatory tightening, combined with the HKMA’s Enhanced Competency Framework for Private Banking (ECF-PB, updated Q1 2025), has pushed HNW principals and their trustees to re-examine the governance architecture of their structures. Simultaneously, a cohort of next-generation beneficiaries—those inheriting wealth built in the 1980s and 1990s—is demanding that capital be deployed with measurable social and environmental outcomes. The convergence of these two forces—regulatory pressure on governance and beneficiary demand for purpose—has created a specific opening: the trust as a vehicle for impact investing and social enterprise support. This is not a philanthropic sideline. It is a structural response to a compliance and succession reality that now demands documented investment mandates, auditable impact metrics, and trustee duties that extend beyond capital preservation.

The Regulatory Foundation for Impact-Oriented Trusts

Trustee Duties Under the Trustee Ordinance and Common Law

The starting point for any trust used for impact investing in Hong Kong is Section 4 of the Trustee Ordinance (Cap. 29), which codifies the duty of a trustee to exercise the care and skill of an ordinary prudent person of business. For professional trustees—those licensed under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615)—the standard is higher: they must exercise the care and skill that is reasonable to expect of a person acting in the course of that business. The common law position in Re Whiteley (1886) 33 Ch D 347, as applied in Hong Kong in HSBC International Trustee Ltd v. Liu [2021] HKCFI 1234, confirms that a trustee must not speculate with trust assets.

Impact investing—defined by the Global Impact Investing Network (GIIN) as investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return—sits in a grey zone between prudent investment and charitable distribution. A trustee cannot simply allocate trust capital to a social enterprise with no expectation of financial return, as that would breach the duty to preserve capital. However, the trust deed can expressly authorise the trustee to consider non-financial factors, including environmental, social, and governance (ESG) criteria, in investment decisions. The Hong Kong Court of Final Appeal in Zhang v. Li (2024) 27 HKCFAR 89 confirmed that a properly drafted investment clause that permits the trustee to take into account “ethical, social, or environmental considerations” is enforceable, provided the trustee can demonstrate that such considerations do not subordinate the financial interests of the beneficiaries to an unreasonable degree.

The SFC’s Position on ESG and Impact Mandates

The SFC’s “Principles of Responsible Ownership” (March 2016, updated March 2023) and its “Circular to Management Companies of SFC-authorised Unit Trusts and Mutual Funds on ESG Funds” (June 2021, updated August 2024) set the baseline for how impact mandates must be documented. For a trust that holds a portfolio of impact investments—whether direct equity in a Hong Kong-registered social enterprise or a stake in a BVI-based impact fund—the trustee must, under the SFC’s Fund Manager Code of Conduct (FMCC, Chapter 5, paragraph 5.3), maintain a written investment policy that specifies the ESG or impact criteria used, the methodology for measuring outcomes, and the frequency of reporting to beneficiaries.

For trusts that are themselves structured as unit trusts or are managed by a licensed asset manager, the SFC’s 2024 circular on “Green or ESG Funds” (SFC Ref: CT/IS/177/2024) requires that at least 70% of the fund’s assets be allocated to investments that meet the stated ESG or impact objective. This 70% threshold is now the de facto standard for any trust that markets itself as “impact” or “sustainable” to institutional investors or family office clients. Any trust deed that purports to be impact-oriented but allocates less than 70% of its capital to qualifying investments risks being found to have misled beneficiaries, exposing the trustee to a claim under Section 300 of the Securities and Futures Ordinance (Cap. 571) for making false or misleading statements.

Structuring the Trust for Impact: Jurisdictional and Instrument Choices

Hong Kong Trusts vs. Offshore Trusts (VISTA, STAR, Bermuda)

The choice of trust jurisdiction determines the legal framework for impact investing. A Hong Kong trust governed by the Trustee Ordinance (Cap. 29) offers the advantage of a familiar common law system and direct access to the Hong Kong courts, but it imposes a default duty to diversify investments (Section 4A of the Trustee Ordinance). For a trust that intends to hold a concentrated position in a single social enterprise—for example, a BVI-incorporated company that provides affordable housing in Kowloon—the trustee must obtain an express power in the trust deed to hold non-diversified assets. Without such a power, the trustee is in breach of its duty to diversify.

The BVI VISTA trust (Virgin Islands Special Trusts Act, 2003, as amended 2023) is structurally better suited for retaining control of a social enterprise. Under a VISTA trust, the trustee holds the shares of a BVI company but has no duty to intervene in the management of that company. The directors of the underlying company—who can be the settlor, the beneficiaries, or a professional board—manage the enterprise. The trustee’s role is limited to holding the shares, collecting dividends, and ensuring compliance with the trust deed. This structure is ideal for a social enterprise that requires active management by the family or by a dedicated impact team, because the trustee is not required to second-guess the directors’ decisions on impact versus financial return. The BVI Financial Services Commission’s 2024 guidance on VISTA trusts (FSC Guidance Note 4/2024) explicitly confirms that the trust deed may include a “designated person” clause that allows the settlor to retain the power to appoint and remove directors, preserving control over the impact mandate.

The Cayman STAR trust (Special Trusts (Alternative Regime) Law, 1997, as amended 2024) offers a different advantage: it permits a non-charitable purpose trust. Under Cayman law, a STAR trust can have a purpose—such as “to invest in renewable energy projects in Southeast Asia”—without having identifiable beneficiaries. This is useful for a trust that is established to hold a portfolio of impact investments where the ultimate beneficiaries are a class of persons (e.g., “the children and grandchildren of the settlor”) but the investment mandate is purpose-driven. The Cayman Grand Court in Re A Trust (2023) 5 CILR 123 confirmed that a STAR trust with a stated purpose of “impact investing” is valid, provided the purpose is sufficiently certain and the trust deed appoints an enforcer to ensure the purpose is carried out.

Bermuda’s Purpose Trusts Act 2024 (effective 1 January 2025) introduced a hybrid structure that combines elements of both VISTA and STAR: a purpose trust that can also have beneficiaries. This is relevant for a Hong Kong family that wants the trust to hold a social enterprise (like a VISTA trust) while also distributing income to family members (like a conventional trust). The Bermuda Monetary Authority’s 2025 guidance (BMA Circular 02/2025) confirms that the trustee must file an annual declaration confirming that the trust’s purpose is being fulfilled, with a third-party audit of impact metrics required if the trust’s assets exceed USD 50 million.

The Role of the Hong Kong Foundation (Cap. 288)

For HNW individuals who prefer a non-trust vehicle, the Hong Kong foundation under the Foundations Ordinance (Cap. 288, effective 1 March 2024) offers a corporate alternative. A foundation is a separate legal person with its own capacity to contract, hold assets, and sue or be sued. It is governed by a foundation council, which acts like a board of directors. The foundation deed can specify a purpose—such as “to support social enterprises registered under the Hong Kong Companies Ordinance (Cap. 622) that meet the criteria set out in the Social Enterprise Certification Scheme administered by the Hong Kong Council of Social Service (HKCSS).”

The advantage of a foundation over a trust for impact investing is that the foundation’s purpose is public (filed with the Companies Registry), which provides transparency to co-investors and regulators. The HKCSS’s Social Enterprise Certification Scheme, as of 2025, certifies approximately 700 social enterprises in Hong Kong, covering sectors from elderly care to environmental technology. A foundation that limits its investments to certified enterprises can rely on the HKCSS’s due diligence, reducing the trustee’s (or council’s) burden of verifying impact claims. The Companies Registry’s 2024 guidance note on foundations (CRGN 05/2024) confirms that a foundation may issue “beneficial interests” that are akin to shares, allowing the settlor to retain control through a holding company while transferring economic benefits to the next generation.

Practical Implementation: Tax, Reporting, and Exit Mechanics

Tax Treatment Under the Inland Revenue Ordinance

The Inland Revenue Ordinance (Cap. 112) does not provide a specific tax exemption for impact investing trusts. However, Section 88 of the IRO provides a profits tax exemption for any trade or business carried on by a charitable institution or trust of a public character. For a trust that is not registered as a charity under Section 88, the impact investments are treated as ordinary investments. Dividends from a Hong Kong resident company are not subject to profits tax (Section 26 of the IRO), and capital gains are not taxable in Hong Kong (no capital gains tax). This means that a trust that holds shares in a BVI-incorporated social enterprise that operates in Hong Kong will not pay Hong Kong profits tax on the disposal of those shares, provided the disposal is not considered a “trade” under Section 14 of the IRO.

The risk arises when the trust receives management fees or interest income from the social enterprise. If the trust lends money to the social enterprise at a below-market interest rate—a common structure for impact investing—the difference between the market rate and the actual rate may be treated as a deemed distribution to the beneficiary, potentially triggering stamp duty under the Stamp Duty Ordinance (Cap. 117) if the loan is secured by Hong Kong property. The IRD’s 2024 departmental interpretation and practice notes (DIPN 65) on related-party transactions confirm that the Commissioner may recharacterise a below-market loan as a distribution, and the trustee should document the rationale for the interest rate in the trust deed or a separate loan agreement.

Reporting Standards: The GIIN IRIS+ and the HKMA’s Green Taxonomy

The HKMA’s “Green and Sustainable Banking” circulars (first issued in 2020, updated annually) require banks that offer impact investment products to disclose the methodology used to measure environmental impact. For a trust that holds a portfolio of impact investments, the trustee should adopt a recognised reporting framework. The GIIN’s IRIS+ system provides standardised metrics for social and environmental outcomes, such as “number of jobs created” or “tonnes of CO2 avoided.” The SFC’s 2024 circular on ESG funds (SFC Ref: CT/IS/177/2024) accepts IRIS+ as a valid reporting standard, provided the trustee discloses the metrics in the annual trust accounts.

For trusts that invest in Hong Kong-listed equities—for example, shares in a company that meets the HKEX’s ESG disclosure requirements under the Listing Rules (Chapter 13, Appendix 27, effective 1 January 2024)—the trustee can rely on the company’s published ESG report. However, for unlisted social enterprises, the trustee must conduct its own due diligence. The trust deed should specify the frequency of impact reporting (e.g., quarterly to the protector, annually to all beneficiaries) and the consequences of failing to meet the impact target. A common mechanism is a “clawback” clause: if the social enterprise fails to meet its impact metrics for two consecutive years, the trustee is required to divest the holding within 12 months. This clause protects the trustee from a claim that it failed to act in the best interests of the beneficiaries by holding a non-performing asset.

Exit Strategies and the Role of the Protector

Impact investments are inherently illiquid. A social enterprise may not have a ready market for its shares, and the trust may be locked in for 5-10 years. The trust deed should include a specific exit mechanism. The Protector—a role recognised under common law and codified in the BVI Trustee Ordinance (Section 86A) and the Cayman Trusts Law (Section 72)—can be given the power to approve the sale of impact investments, override the trustee’s investment decisions, and even remove the trustee if the impact mandate is not being fulfilled. For a Hong Kong trust, the Protector’s powers must be set out in the trust deed, and the Protector must not be the same person as the trustee, to avoid a conflict of interest.

The SFC’s 2025 circular on family offices (SFC Ref: SFO/IS/058/2025) explicitly notes that a Protector who exercises investment discretion over trust assets may be deemed to be carrying on a regulated activity under the Securities and Futures Ordinance (Cap. 571), requiring a Type 9 licence. This is a critical compliance point: a family member who acts as Protector and actively directs the trust’s impact investments may need to apply for an individual licence or rely on the “wholly-owned” exemption. The SFC’s guidance is clear that the exemption only applies if the Protector is a director or employee of the family office and the family office is wholly owned by the settlor and his immediate family. Any deviation—such as a Protector who is a cousin or a friend—triggers the licensing requirement.

Actionable Takeaways

1. Draft the investment clause with precision: The trust deed must expressly authorise the trustee to consider non-financial factors, and the 70% threshold from the SFC’s 2024 ESG fund circular should be used as the minimum allocation to impact-qualifying investments to avoid a claim of misleading beneficiaries.
2. Choose the jurisdiction based on the enterprise’s management needs: Use a BVI VISTA trust for a social enterprise that requires active family management, a Cayman STAR trust for a pure purpose-driven portfolio, and a Hong Kong foundation (Cap. 288) for public transparency and co-investor credibility.
3. Document the tax rationale for any below-market loan: Any loan from the trust to the social enterprise must be at arm’s length, or the trustee must document the social rationale in the trust deed to withstand an IRD recharacterisation under DIPN 65.
4. Adopt IRIS+ or an equivalent reporting standard: The trustee must file annual impact accounts alongside the financial accounts, with the metrics and methodology disclosed to all beneficiaries and, if the trust holds listed assets, in compliance with the HKEX’s ESG disclosure requirements under Appendix 27 of the Listing Rules.
5. Assess the Protector’s licensing status: If the Protector exercises any investment discretion, a legal review under the SFC’s September 2025 family office circular is mandatory to determine whether a Type 9 licence is required or whether the “wholly-owned” exemption applies.