Industry experts have suggested that changes are needed in the way fiduciary duty is being interpreted to ensure trustees can consider climate change issues, despite mixed views over the best way to go about this and whether guidance could prove enough to create change.

The Work and Pensions Committee today (21 February) held a one-off session to follow up on its 2021 pension stewardship inquiry, and consider whether changes to fiduciary duties are needed in light of market shifts.

During the session, ShareAction director of policy, Lewis Johnston, said that the way fiduciary duty is currently being framed is leaving trustees unable to take full account of the impact of some of their investments on members.

“We are emphatic that the centre point of all of this has to be the member of the pension scheme, it's their interest that trustees are there to serve, and the way that the law is currently framed actually prevents trustees from fully exercising that duty now," he stated.

This was echoed by Pensions for Purpose CEO, Charlotte O'Leary, who argued that while the fiduciary duty is “permissive”, this doesn’t mean it is working.

"To have such a wide disparity between those that are investing in line with what we're trying to achieve from a climate change perspective to those that are not considering it at all, means that there is something fundamentally wrong," she stated.

Adding to this, UK Sustainable Investment and Finance Association chief executive, James Alexander, said that there is an "inconsistent interpretation" of fiduciary duties by trustees, often because of the investment advice they receive.

"Some take a very a strong view that it's only financial factors in their purest sense that should be considered, and that's often-short-term financial factors, while others take a different approach that would be more aligned to considering the long-term sustainability and climate impacts of investments as well as well as other things," he explained.

Long-term thinking

In particular, Alexander said that time horizons and long-term thinking are “really key challenges” pension trustees need to grapple with, particularly when defining what is and isn't a financial factor.

O'Leary agreed, pointing out that it is not only investment time frames that trustees must consider, but also time frames in relation to the cohort of savers that the trustees represent.

"Trustees are there to honour the benefits of all of their members, youngest and oldest, and it is within that context that systemic risks and opportunities like climate change need to be viewed," she stressed.

And Alexander added that whilst climate reporting requirements, such as those introduced in 2021, have had a positive impact “it still doesn't necessarily change the interpretation of fiduciary duties around what parts of that reporting to include and consider as part of an investment decision”.

The law, or the interpretation?

When pressed as to whether it was the law itself that was presenting the issue, or understanding of the law, Johnston said that it is both, but “ultimately” the issue lies with the law itself.

"It's almost an outside in approach where the scheme to has to assess the return and risk, and balance it in terms of the impact of the outside world on the returns of the scheme," he stated.

"What it disregards is the agency and role of that scheme in shaping those effects and those impacts in the real world, and I think that's a really, really important distinction.

"So I certainly think there needs to be a change in in the law in that respect... "

However, others on the panel were more divided, as Alexander said that "it's not the problem necessarily with fiduciary duties per se, it's a problem with how they're being interpreted across the board".

O'Leary agreed that the interpretation is the key issue, as well as capacity, as she stressed that "pension funds are actors in a system, they aren't divorced from it, they can't make separate decisions".

"At the moment [pension schemes are] being put at odds with what the system is trying to achieve," she continued.

"So one of the things that we've suggested is guidance for trustees to aid them in their decision making, but also an understanding that they heavily rely on their advisers who are themselves companies, and they also invest in companies, and their sponsors are companies.

"So one of the things that I suggested as a consideration is changes to the Companies Act that would align what we're trying to get trustees to do with what companies are doing."

Creating a change?

Alexander also called for greater guidance, agreeing that more clarity is needed on fiduciary duties and the concept of considering pension schemes within the wider economy.

In particular, a number of panellists suggested that the Financial Markets Law Committee's (FMLC) recent report on pension scheme trustees’ evolving fiduciary duties should be used as the basis for future guidance.

"What we now want to see is this report from the FMLC taken on by The Pensions Regulator (TPR) and codified into guidance for trustees, and we think this committee could do a nice job by writing to TPR and asking them to look into this," Alexander stated.

Make My Money Matter CEO, Tony Burdon, agreed, suggesting that while the FMLC's report is an "excellent piece of work", it is a "lawyerly" report, which should be "translated" to better help pension trustees.

And whilst Burdon acknowledged that legal changes may be needed in the long-term, he argued that immediate guidance would be a quicker process.

"This is an urgent issue," he stated. "We need TPR and the Department for Work and Pensions (DWP) to translate it immediately into clearer guidance for trustees and that will then give them the confidence to make the right kind of decisions without fear of legal challenge."

Alexander also agreed that any new guidance based on the FMLC report should be given time to bed in before looking to make legal changes, suggesting that "at that point we'll have a clear understanding of whether this is sufficient".

However, Johnston argued that history has shown that "guidance hasn't worked", arguing that legal changes will still be required.

"And you can change the law in a way that preserves that core duty to act in the financial interests of your beneficiaries," he explained.

"It preserves the discretion the core principles of prudence and loyalty are all still there, but it just integrates this point about the impact of the scheme, and it doesn't treat pension investments as a kind of passive actor, kind of bobbing along in the wider economy. It takes account of their role in shaping that world and shaping that economy."

Johnston also disagreed that this would present a "Herculean task", arguing that the changes that ShareAction are proposing aren't a complete revolutionary overhaul of the existing fiduciary duties.

"We actually have a responsible investment bill where we've set out exactly how that would be achieved. And I think it could be achieved in a relatively straightforward and a really prudent and cautious way," he stated.

Broader considerations other than climate change are also being brought into the conversation around fiduciary duty, as O'Leary pointed out that "one of the biggest risks we face for pensions is a lack of contributions."

"At the moment we've got staggering gaps, particularly around gender," she stated.

"So you know, in terms of thinking about fiduciary duty, there are many things that are not being addressed here."

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