July 03, 2014
UK Clarifies Long Term Fiduciary Duty
by Robert Kropp
A report issued by the UK Law Commission determines that it is the duty of pension fund fiduciaries
to consider environmental, social, and corporate governance factors when they could impact
A recently published report on the
state of impact investing in the US specifically addressed the concept of fiduciary duty as it was
defined by a 2008 Employee Retirement Income Security Act (ERISA) ruling. The ruling has been
interpreted by many mainstream fiduciaries as preventing them from investing with any end other
than the strictly financial.
“We believe it would be beneficial for the Department of
Labor to make it clear that consideration of targeted economic, environmental, and social factors
is consistent with ERISA’s fiduciary obligations to plan participants,” the report states.
And in her comments on the report, Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment,
stated, "A statement by the Department of Labor would help to correct the confusion generated by
the bulletins it issued in 2008 that fiduciaries may not make investment decisions based on 'any
factor outside the economic interest of the plan,' language that appeared to contradict its earlier
guidance that fiduciary responsibility does not preclude consideration of collateral, social impact
benefits that investment vehicles may offer."
In the UK, meanwhile, the UK Law Commission
has issued a report intended to help clarify that considering the long-term investment impacts of
environmental, social, and corporate governance (ESG) factors is indeed a part of the fiduciary
duty of pension fund trustees.
The report, the Commission states, "arose from the Kay
Review," published in 2012. Among the reforms articulated in the Review was the restoration of
"relationships of trust and confidence in the investment chain, including by applying fiduciary
standards more widely within the investment chain."
According to the conclusions of the
Commission, "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."
permits trustees to make investment decisions that are based on non-financial factors," the
Commission continued, "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."
the US, the 2008 ERISA ruling has had the effect of delaying widespread consideration of ESG
factors in investment decision making, according to many sustainable investors and governance
"The Department of Labor still has interpretive advice out there that is both
out of date and in conflict with current understanding of risk, and that is guidance on fund voting
for extra-financial issues," corporate governance expert Stephen Davis told SocialFunds.com in
2011. "The inaction makes even less sense given the renewed attention to fiduciary duty."
The 2008 ruling, which was made by an outgoing appointee of the Bush administration, stands in
sharp contrast to the aspirations of the United Nations' Principles for Responsible Investment
(PRI), whose 1,265 current signatories collectively manage assets in excess of $45 trillion.
"As institutional investors, we have a duty to act in the best long-term interests of our
beneficiaries," the PRI states. "In this fiduciary role, we believe that environmental, social, and
corporate governance (ESG) issues can affect the performance of investment portfolios."