The Review identified widespread concern about how fiduciary duties were interpreted in the context of investment. In particular, some stakeholders felt:
- it was not clear who in the investment chain was subject to fiduciary duties and what those duties were;
- their fiduciary duties required them to maximise returns over a short-time scale, precluding consideration of long-term factors which might impact on company performance;
- their obligations were entirely defined and limited to their contractual obligations or required no more than a duty of care.
The report concludes that trustees should take into account factors which are financially material to the performance of an investment. Where trustees think ethical or environmental, social or governance (ESG) issues are financially material they should take them into account.
However, whilst the pursuit of a financial return should be the predominant concern of pension trustees, the law on fiduciary duty is sufficiently flexible to allow other, subordinate, concerns to be taken into account. We conclude that the law permits trustees to make investment decisions that are based on non-financial factors, provided that:
- they have good reason to think that scheme members share the concern; and
- there is no risk of significant financial detriment to the fund.
Fiduciary Duty Still Unclear to Me
So, fiduciaries can take ethical principles into account, as long as fund members share those principles (how many governing committees take surveys of their members?), and as long as acting on such principles incurs no ‘significant’ financial risk. How many schemes survey their members on ethical principles? Would taking into account ‘stranded assets’ constitute incurring a ‘significant’ risk. It sounds like values can come into play, as long as money is the highest value and your members agree with the other values, eh?
Video on Fiduciary Duty
David Hertzell, Law Commissioner for commercial and common law, sets out the conclusions of the Law Commission’s report on fiduciary duties. The report clarifies the law on pension trust investment and (at 3’00”) makes recommendations for the governance of contract-based pensions. The report is available.
The UK government’s recent response to the report on fiduciary duty: p26 – 32.