Investors split over ‘necessity’ of FMLC paper on fiduciary duty and climate risk

Last month, the Financial Markets Law Commission (FMLC) published a paper outlining that trustees failing to incorporate climate change as a material risk factor could be in breach of their fiduciary duty.

Alongside this, the paper acknowledged that current legislation may not yet capture the full scope of the climate crisis and highlighted that our understanding of the financial risks and returns of climate change is likely to develop.

At the UK Sustainable Investment Forum’s (UKSIF) Ownership Day in London last week, investors and trustees debated whether the FMLC’s paper was necessary and whether it’s “beating the right players over the head”.

Provoking the discussion was Andrew Warwick-Thompson, professional trustee, Capital Cranfield Pension Trustees, who stated that he was “quite surprised” that there were trustees out there who did not consider climate change as a financially material consideration.

“I have not attended a trustee meeting where any trustee on any board has ever turned around and said ‘I don’t think climate is financially material’.

“So, I am quite surprised. I welcome all clarifications if it's necessary, I am simply surprised that at this stage, it is considered a problem”.

Warwick-Thompson explained that where the “problem” may lie is with members. He suggested that members believe that climate is “important”, however sometimes don’t understand why their pension funds have “forgone some incredible investment returns in oil companies as a result of them being excluded”.

'Big proportion of market not performing’

However, Diandra Soobiah, head of responsible investment at Nest pointed out that there are “thousands of small pension funds, that actually make up a big proportion of the market, where their trustees aren’t thinking about climate”.

Soobiah stated that FMLC’s piece of work was a “really helpful and much-needed clarification” for the sector, with it being “potentially transformational for some trustees”.

She explained that defined contribution (DC) schemes “may be a lot more progressive” in understanding that climate change is a material risk factor.

But “if you go up and down the country and tease out some of these smaller schemes. I think there is a risk that they are not tying in climate and sustainability issues with financial risks and opportunities,” she added.

‘Beating the right players on the head’

Warwick-Thompson responded that he didn't disagree with Soobiah’s point, remarking that during his time at The Pensions Regulator there were “some trustees who were in one way or another incompetent”.

“I believe that driving up standards and trusteeship is important, and consolidation is an important way of doing this.”

Warwick-Thompson stated that the most important thing in this case is that the big pension schemes, such as Nest, are “doing the right things” on climate.

“A number of those smaller schemes that are not doing the right thing are dwindling. The tank is dropping on those rapidly through consolidation and for other reasons.

“So, do we really want to have the entire market including the people who are doing the right thing beaten over their heads to do things better, which they’re already doing? Just because there are a bunch of people who didn't get the memo.

“Can we please have regulatory focus on those people who didn't get the memo,” Warwick-Thompson argued.

However, Maria Nazarova-Doyle, global head of sustainable investment at IFM investors, stated that the paper “definitely is not beating people over the head”.

“It’s progressive and it’s taking us forward.

“It's given them further development opportunities, for example around narrative strategy analysis and systemic risks, which some do, and some don't. It's kind of taken that debate one step further,” she argued.

Manager and advisor focus

However, Soobiah noted that there needs to be a greater focus on the action of advisors and investment managers, suggesting that both players need a “closer agreement of interests”.

She stated that the way that advisors are raising the issue of climate change “needs to be more consistent with trustees”.

“Pension fund trustees are thinking more long-term and more broadly about systemic risks and issues, but are their investment managers doing this?

“So, I do think that trustees should be almost allowed to forego short-term returns, but are their investment managers willing to go along with this as well?” Soobiah added.