The Environmental Audit Committee’s findings from its green finance enquiry, which found that pension scheme trustees’ fiduciary duty is often misinterpreted as a duty to maximise short-term returns, has also criticised the FCA’s reluctance to act on the Law Commission’s recommendations on clarifying the duty of contract-based schemes in relation to environmental, social and governance factors. It says the FCA ‘should rectify this by the end of the year’, bringing its standards in line with those of the Pensions Regulator.
The report found the ‘fiduciary duty’ of pension scheme trustees is misinterpreted as a duty to maximise short-term returns and says the quarterly earnings cycle and structure of remuneration for investment consultants and fund managers encourages a pursuit of short-term returns rather than long-term value creation.
The committee also called on the Department for Work and Pensions to propose a change in the law to require pension fund fiduciaries to actively seek the views of their beneficiaries when producing their Statement of Investment Principles or Investment Strategy Statements. The DWP must set out guidance on how to ensure that evidence of members’ views is gathered robustly, the MPs said.
The report says: “Considering climate change risk from the perspective of pension regulation is especially important given the long timescales involved and the many hundreds of billions of pounds in UK pension schemes. Pension fund trustees have a fiduciary duty to act in the best interests of their beneficiaries. This include taking account of long-term risks, such as those arising from climate change. Although we heard examples of good practice during the inquiry, the Government also admitted in its evidence that there is widespread misunderstanding amongst trustees on the scope of their fiduciary duty in relation to environmental risks.
“We were deeply concerned to hear how structural incentives also promote the pursuit of short term returns by investment managers acting on behalf of pension funds, often leading to the neglect of longer-term considerations—including environmental sustainability and climate change-related risks and opportunities. The Government should clarify in law that pension schemes and company directors have a duty to protect long-term value and should be considering environmental risks in light of this.”
DC Investment Forum executive director Louise Farrand says: “We welcome the findings of this report. Looking to the long-term is in DC members’ best interests. Without considering the full range of risks, pension schemes are missing a vital part of the jigsaw. As investment managers, we believe in engaging with the companies in which we invest, be it through meetings or voting for example, to ensure they are taking environmental, social and governance issues into account in their decision-making. We believe the best governed companies will offer the most favourable long-term returns. Therefore, identifying them, plus engaging to improve corporate governance where we see shortfalls, is not only in our interests as investment managers, it is ultimately best for savers.
“Responsible investment is not only the right thing to do from an investment perspective, savers expect it, too. Defined contribution (DC) savers expect their pension schemes to embed sustainability in their financial decision-making. We surveyed 1,000 DC savers in collaboration with Ignition House (Navigating ESG, and found that they expected responsible investment was already being done on their behalf, and were surprised to hear that this isn’t the case. Almost three quarters of DC savers said they feel strongly about the environment and 81 per cent believe that businesses have a wider social responsibility than simply making profit. In face to face qualitative interviews with Ignition House, DC savers were shocked when they were told that their money might be invested in cigarettes or arms manufacturers, for instance.”