Trustees call for a re-definition of fiduciary duty to drive net zero transition

The definition of fiduciary duty needs to be “redefined” as it is hindering pension funds’ ability to take “positive action” towards climate change, asset owners at the Pensions and Lifetime Savings Associations' (PLSA) ESG conference have stated.

Speaking to delegates, Natalie Winterfrost, director at LawDeb Pension Trustees, outlined that currently fiduciary duty is a “thorny area” for trustees when it comes to investing in climate solutions due to its “narrow definition”, which doesn’t account for “externalities”.

“We focus inwardly on our own risk and return and we don’t think about the implications on the globe,” she told attendees.

The “really narrow” definition of fiduciary duty tells pension fund trustees that they can invest in climate change, but it must be within two rules: that it can’t be detrimental to returns and it must have buy in from all of its members, Winterfrost explained.

The second rule is a problem for LawDeb Pensions as environmental issues are “falling down the tables” in its client surveys due to the recent movement regarding labour rights and fair pay. On top of this, pension fund members “don’t want” to make investments that could slightly impact returns, she explained. 

“So, the narrow definition of fiduciary duty does make taking positive action quite difficult. Ultimately, I think re-defining fiduciary duty would be the right thing to do, to really understand it in a different way that infers externalities,” Winterfrost argued.

Tony Burdon, CEO at Make My Money Matter, echoed Waterfront’s point, highlighting that enhancing the definition of fiduciary duty could unlock “huge investments into climate solutions”.

“I think we need to really look at it [fiduciary duty] because we need to improve the guidance so that it can interpret the wider and systemic impacts,” he added.

Can't ‘divorce’ ESG from financial risk

Joining Winterfrost and Burdon on the panel was Jacqueline Jackson, head of responsible investment at Local Government Pension Scheme pooling vehicle London CIV. Jackson highlighted that despite her not “necessarily supporting” the idea of re-defining fiduciary duty, she stated that environmental, social and governance (ESG) and geopolitical risks cannot be divorced from financial risk.

“I think that is quite an important consideration because we've seen already this year many different issues across the ESG spectrum translate directly into the scores and therefore compromises fiduciary duty if they're not being managed accordingly and monitored,” she explained.

Jackson also warned that tackling climate change should not be pushed back any further but needed to be addressed today.

Also on the panel was Paul Lee, head of stewardship and sustainable investment strategy at Redington, who highlighted that potential answers around the problems surrounding fiduciary duty could be coming in two weeks’ time when Financial Markets Law Committee will produce its report on the subject.

“It will cover all the financial, non-financial and two stage approach that we have talked about today. It’s actually practical and helpful and will hopefully help trustees understand things,” he added.

However, Winterfrost added that consultants advice can also be an obstacle when allocating capital towards net zero investments.

"This is a real crisis that we're facing right now. So, an easy thing for the scheme to do is to think about moving its passive equity away from a global cap benchmark to something that is climate aware or tilted. But the advice we get back is quite often wishy washy," she stated. 

Picture credit: Tina Miguel