Fiduciary duty – Feature
ESG scores saw their shares perform better in a crisis, a point highlighted during the pandemic. George Serafeim, a profes- sor at Harvard Business School, analysed the share price per- formance of more than 3,000 companies globally as Covid-19 spread. He found that companies with strong ESG credentials suffered less severe shocks to their valuation while the market col- lapsed. Even more strikingly, there was a more pronounced effect in industries that were badly hit by the pandemic, such as retail, restaurants and airlines. So, on this showing, pension funds using some form of ESG investment approach may have benefited nicely during the pandemic.
ESG factors
A push back also has come from asset owners demanding that asset managers pay attention to ESG issues – shifting the fidu- ciary issue further on its head. In a 2019 Principles for Respon- sible Investment (PRI) Reporting and Assessment framework, 69% of asset owners stated that they consider ESG factors when appointing asset managers, and 62% consider ESG-re- lated factors in all stages of asset manager selection, appoint- ment and monitoring.
As part of that annual reporting and assessment framework, the PRI asked signatories to discuss how they interpret their fiduciary, or equivalent, duties. More than 90% acknowledged the consideration of ESG issues in their investment processes as a component of their fiduciary duties.
The vast majority of these regarded the consideration of ESG factors as a necessary and important part of fulfilling their fidu- ciary duty towards their clients or beneficiaries – a conclusion that the UNEP FI would no doubt be pleased with. A smaller number noted that this duty “allowed” or “permitted” them to take account of ESG issues where relevant, and a minority – a
measly 3% – perceived fiduciary duty as a constraint to the con- sideration of ESG in some circumstances. For most, the analysis of ESG issues was seen as enabling bet- ter risk management or the avoidance of downside risk, less than half highlighted the investment opportunities, or upside, associated with such an analysis. Stewardship activities such as engagement and voting were identified by close to 40% of respondents as an important way of enhancing value and deliv- ering on their fiduciary duty.
Changing dynamic
In addition, professional trustees told a study by Charles Stan- ley Fiduciary Management that they wanted greater use of ESG metrics.
We want to invest sustainably over the long term because we believe that will provide our members with
better assets. Helen Dean, Nest
All this means that fiduciary managers must be alert to the changing dynamic ESG presents to the industry. Being a prag- matic bunch, fiduciary managers are consulting more on ESG issues to deal with this demand, even if many originally had a different definition about their work. Some have even suggested they wish to get rid of ESG as a label as it will be central to their role, making the ESG turnaround complete within the fiduci- ary role. Giving a legal perspective, Susannah Young, partner in the pensions team at law firm Burgess Salmon, offers funds advice on how to deal with the changing fiduciary picture. “Given the severity of issues, such as climate change, there has been an increased push within government and the pensions sector more generally to support investment in entities which miti- gate and adapt to climate change in particular. “In light of this, pension schemes need to update their State- ments of Investment Principles, set out policies on non-finan- cial considerations and stewardship matters, implement those policies and understand disclosure requirements,” she adds. “ESG factors are particularly prominent when considering pension scheme investment. Due to the rise of issues such as climate change, regulatory bodies have increased the need for transparency, disclosure, planning and consideration among those managing pension schemes. Trustees now have further duties, and this is only likely to increase.” The last point is vitally important for trustees to keep in mind. Given its importance in defining the fiduciary position and ESG, the final words must go to the UNEP FI. “Fiduciary duty itself is not a static concept,” it says. “It evolves and adjusts in response to changes in knowledge, market practices and con- ventions, regulations and policies, and social norms.” It then adds what it believes to be closure on the matter: “The conceptual debate around whether ESG issues are a require- ment of investor duties and obligations is now over.” It appears that Her Majesty’s opposition may have been right to raise the issue.
Issue 109 | December-January 2022 | portfolio institutional | 49
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