Feature – Fiduciary duty
accumulation journey have contributed to things that destabi- lise quality of life and wellbeing, and even raise costs in the future, then that member’s best interests have not been opti- mally served,” she said. “We do need an evolution of fiduciary obligations, so that we retain that old historic focus on best interest but updated for the context we operate in where we have a climate crisis and give trustees more latitude to shift away from what could be profitable investments in the short term, but which actually exacerbate the climate crisis,” Howarth added. This seems a fair and reasonable approach to shifting the dial on the fiduciary role towards an ESG methodology while tick- ing the important box of getting the best return for members. But for some pension funds this does not necessarily tally. For Nest chief executive Helen Dean there is no conflict between undertaking ESG investment and the principle of fiduciary duty. “We see complete congruence between it and the point is we are long-term investors. “We want to invest sustainably over the long term because we believe that will provide our members with better assets,” Dean says. “Therefore, in our view, investing sustainably will achieve that. So, what we are doing is in the best long-term financial interests of our members.” The message here is simple: leave us be and we, as pension funds, will get the returns needed while abiding by ESG principles.
Avoid overreach However, a warning has been fired by Morten Nilsson, chief executive of the BT Pension Scheme. “We need to be careful that pension schemes do not overreach in trying to do every- thing and be everything for every key topic we have going, because that will be difficult to defend,” he adds. This is a fair concern. In the earnest pursuit of doing the right thing, pension funds could follow ESG or another investment trend but end up chasing rainbows. In other words, the princi- ples of investment must be built on solid ground. The United Nations Environment Programme Finance Initia- tive (UNEP FI) attempts to do just that. But it is also an indica- tion of how the fiduciary duty function has shifted, as the organisation clearly sets out what is a different and new defini- tion of fiduciary.
“Investors that fail to incorporate ESG issues are failing their fiduciary duties and are increasingly likely to be subject to legal challenge,” warns Fiduciary duty in the 21st Century published by UNEP FI, the opposite of the principles fiduciary manage- ment has built its reputation on. According to UNEP FI, there are three main reasons why the fiduciary should be required to incorporate ESG issues. One, ESG incorporation is an investment norm. Two, ESG issues
48 | portfolio institutional | December-January 2022 | issue 109
We need to be careful that pension schemes do not overreach in trying to do everything and be everything for every key topic we have going, because that will be difficult to defend. Morten Nilsson, BT Pension Scheme
are financially material. Three, policy and regulatory frame- works are changing to require ESG incorporation. The shift in the relationship between the fiduciary and ESG probably rests on the second point. “The assumption that ESG issues were not financially material, and so, therefore, inconsist- ent with fiduciary duties, is no longer supported,” UNEP FI says.
Sustainable returns Another issue, and the source of much historical disdain towards ESG, is that at one time ESG investment was seen as a good, ethical approach, but one that did not sit easily as part of an effective portfolio. This was because ESG returns were not top notch, creating a clear conflict with the fiduciary aim of pension funds investing in their members’ best interests for the best return. But the volume of research has changed that. A paper pub- lished in 2014, The Impact of Corporate Sustainability on Organisational Processes and Performance by Robert Eccles et al, investigated the long-term effect of corporate sustainability on organisational processes and performance. Using a matched sample of 180 companies in the US, the paper found that corporations which had voluntarily adopted sustainability policies significantly outperformed those which had not – termed ‘low sustainability’ companies. The paper also suggested that highly sustainability firms gen- erated significantly higher stock returns, signifying that indeed the integration of such issues into a company’s business model and strategy may be a source of competitive advantage in the long run. In another ESG investment bonus, companies with higher
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