As the demand for climate-conscious investment strategies intensifies, traditional interpretations of fiduciary duty are coming under scrutiny. Trustees are facing the challenge of balancing long-term financial performance with the urgent need to address climate change. At a recent Corporate Adviser round table event, delegates debated whether the definition of fiduciary duty should be broadened as a result, to include climate risks and sustainable investment goals.
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A key part of this debate was whether asset managers should be taking a more active role when it comes to climate action, or whether current industry initiatives were sufficient to drive change on this issue. Those at the event agreed on the importance of collaboration when it comes to global challenges like climate change, and how this will be a key issue for the UK DC sector, given its relatively small size on a global scale. There was also discussion on the need for private markets to establish a credible climate narrative that effectively incorporates sustainability into future investment decisions.
Fiduciary duty
Julius Pursaill, an independent consultant who has NatWest Cushon as a client, made the case that fiduciary duty has to be expanded, especially in light of climate risks and sustainable investment objectives. He contends that the way fiduciary duty is currently interpreted, which places emphasis on the fund’s size at retirement, restricts trustees’ capacity to fund projects that might have longer-term, more extensive advantages.
He explained: “The current interpretations of fiduciary duty, which focus on the size of the fund at retirement, are very narrow. You can take into account some subsidiary and ancillary factors, but ultimately the trustees are being told they need to focus on the size of the fund at retirement.”
He said trustees could support investments in climate transition projects, even if the financial outcomes remain uncertain by expanding fiduciary duty to include members’ quality of life. However, Pursaill acknowledged that trustees remain hesitant to take such steps at present, despite examples, like investment into local authority social housing, proving to be successful.
Not everyone on the panel agreed that regulations needed to change. LCP head of responsible investment (systemic stewardship) Claire Jones, said that opinions on the interpretation of fiduciary duty differ, and there is certainly scope within the current framework to push boundaries further. She said this may be necessary if pension schemes are going to be able to tackle climate change more effectively.
She said: “The people who are saying that the current interpretation is sufficient are probably people who don’t appreciate that to deliver on long-term member outcomes requires going beyond the boundaries of what is currently possible within fiduciary duty.”
She believes this will ultimately lead to broader conversations about integrating quality of life considerations into fiduciary duty, allowing trustees to explore more sustainable and impactful investment opportunities.
Hymans Robertson head of DC investment and master trust Alison Leslie said she was uncertain that regulation alone would bring about change, arguing instead that progress comes when people take bold actions, which gradually set boundaries, similar to legal precedents. She pointed out that many are hesitant to lead but mentioned LGPS as “a great example of an impactful perspective” because of their flexible, long-term strategies.
She said: “The difficulty is being first out of the gate because people never want to be the ones taking those first steps. So I think when you’ve got some bold movers you then start to get the boundaries expanding.”
Now: Pensions and Cardano UK head of sustainability Keith Guthrie, addressed the challenge of balancing fiduciary duties with climate objectives, particularly in the context of achieving the 1.5-degree transition. Guthrie noted that fiduciary duty could conflict with the need to promote positive environmental change, but that trustees can work to influence a positive climate outcome even if those choices don’t always align with short-term financial goals.
Meanwhile Martyn James, director of investment at Now: Pensions, pointed out that failing to meet climate targets could harm the global economy, thus negatively impacting investments like stocks and bonds. This, he argued, meant that trustees already have a fiduciary duty to manage assets in a way that avoids such risks, and there is already some alignment between trustees’ financial and environmental goals over the longer term.
Pursaill noted that ongoing fossil fuel exploitation by sovereign nations can make some scheme’s individual climate initiatives ineffective. He argued that robust policy support is essential for meaningful progress, stating: “I think this point about policy and policy engagement versus decarbonisation targets, is a really important one.”
Jones agreed with Pursaill but said she is worried about the challenges facing the UK DC industry. According to her, there is a chance that investments made along a 1.5-degree pathway will have worse financial results than those made in scenarios with greater temperatures. She feels that trustees should prioritise stewardship and use their power to facilitate the transition without compromising a significant amount of short- to medium-term financial gain.
Leslie added that while current policies and targets may not be perfect, it was important to start taking action on this issue. She said: “You have to start somewhere. It puts a line in the sand and then you start measuring something and as thinking evolves, you realise you might not be on the right path, but it moves you in the right direction.”
Collaboration
One of the key takeaways from these discussions was the importance of collaboration. Head of stewardship at Church of England Laura Hillis emphasised that group actions have a greater impact than individual action, and this is especially true when looking at relatively small areas of the global financial market, such as the UK DC sector. She emphasised how strong stewardship and market signalling can propel industry change, and she thinks asset owners may have a bigger say in policymaking, including pushing for a move away from fossil fuels.
She said: “There is an opportunity to build trust with asset owners in a different way, that we maybe haven’t done yet: collectively building a sense that we want to see policy, we want to see regulation, that can shift markets. This is what it would take to build market confidence in climate solutions and pull the market away from fossil fuels.”
Pursaill pointed out that pension schemes are unable to interact with each company on an individual basis because of resource constraints. He said working together increases both influence and power helping to ensure that more businesses or sectors are taking climate action, allowing for a wider impact.
Jones said that in order to maximise impact, a coordinated strategy is required, particularly when interacting with the UK government and other stakeholders. She said: “You need the collectives, but then all the collectives need to come together to actually push upwards.”
Pursaill added though that some in the DC sector were not always willing to collaborate, particularly on stewardship issues. He said he had tried to co-ordinate such activity with four master trusts, on both stewardship and non-stewardship issues. Although the non-stewardship initiatives made some headway, he said there was no reaction when it came to the stewardship initiatives.
According to his view on this, master trusts may have been worried about anti-monopoly laws or competitive advantage, which could have hindered coordinated action.
Hillis highlighted the Australian model, the Australian Council for Superannuation Investors (ACSI), which involves super funds paying fees for voting advice, collective stewardship, and policy engagement. It is a member-driven initiative, overseen and with governance by asset owners.
According to Hillis, a similar strategy could work in the UK, although she points out there are differences between the Australian and UK markets, with UK DC schemes being significantly smaller and less well funded than their Australian counterparts.
She says the Australian system is competitive, but this hasn’t stopped people from working together. Hillis says she hopes that larger competitive UK companies — for example Aviva and Legal & General — should be able to do the work together on stewardship issues without major problems.
Asset managers
James brought attention to a possible barrier to collaboration in the UK pension system. He says that the use of third party asset managers in the UK DC ecosystems effectively puts another layer between voting and alignment with trustees’ ESG and sustainability goals. This he said might make it more difficult for UK pension plans to work together effectively.
Guthrie mentioned how asset managers’ interactions with clients are changing in the sector. Asset owners have been trying to persuade asset managers to act in a way that meets the expectations of their clients for years. He said that at first, some big asset managers responded by making changes, but political backlash, particularly in the US, has caused some to put business interests ahead of their commitment to change.
According to Guthrie, asset owners are faced with the option to either adopt the asset managers’ present strategy or switch to a different manager. He said ensuring asset owners’ beliefs align with their managers’ actions is now more important than trying to influence asset managers and encourage them to adopt new voting tactics. He said: “I think we’re at that point now where we’ve moved beyond the ability to influence asset managers I think we’re much more in a situation where you have to change your asset manager because you’re not going to get the engagement that you would otherwise want.”
Hillis also added that asset owners rarely fire asset managers for acting against their interests, as fees and other factors often influence their decisions more than climate behaviour.
She said public accountability and market signals, such as dismissing underperforming managers, would, in her opinion, force change; nevertheless, a change in economic incentives, such as the removal of fossil fuel subsidies, would be crucial in getting asset managers to modify their voting patterns.
Hillis said: “I think if more asset owners dropped asset managers for those reasons and said that publicly, I think that would be an incredible market signal that would help push asset managers and drive change across the industry.”
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