Reinterpreting the term ‘fiduciary duty’ could enable UK-based trustees to shift to a long-term mentality and enable them to consider climate and other systemic risks, according to research by LCP consultants.
Chief executive officer Aaron Punwani has been leading industry calls to update the current interpretation to enable trustees to take a long-term approach.
LCP noted that currently, the majority of UK pension assets are held by closed defined benefit (DB) pension schemes, many of which may be considering a buyout in the short to medium term. In instances like these, a trustee’s primary fiduciary duty is to make their own members’ benefits secure.
The fact that their holding in growth assets is both small and temporary means they may feel limited in their ability to influence climate change outcomes, the consultancy noted.
It added that clarifying the term fiduciary duty includes consideration of members’ best financial interests over the remainder of their lifetime, so that DB trustees can and should legitimately consider outcomes beyond buyout.
LCP said that reinterpreting trustees’ fiduciary duty should note regard for the real-world impact of their investment decisions, not just the impact that external factors – such as climate change – have on their schemes’ investments.
A quarter of trustees surveyed by LCP have agreed that there should be a new interpretation of what fiduciary duty is, to enable trustees to consider climate and other systemic risks. A further 44% said dealing with climate risk in this way is already a route available to trustees.
The survey results also show that the number of large schemes over £5bn in assets that have net zero targets has increased from last year, most likely influenced by Task Force on Climate-related Financial Disclosures (TCFD) reporting rules that they now have to follow.
Furthermore, the LCP survey also shows that there has been an increase in the number of schemes with under £500m in assets that have set a net zero target despite the fact that there is no regulatory pressure to do so.
Punwani said it was “good” to see that there is an increase in schemes setting net zero targets, even among smaller schemes that have no current requirements in this area.
However, he added that the current compliance-focused reporting requirements are not going to be of much help to the planet and society unless they are also accompanied by meaningful real-world action, which he said a re-interpretation of trustee duty would drive.
Punwani said: “The survey results show that there is support for trustees to have a longer-term view around managing systemic climate risk and for this to be a legally safe interpretation of their duty.
“Ultimately, schemes have the power to really impact the future. Redeploying assets and effective stewardship can change the outlook for climate change and, as an industry, we need to be on the front foot when it comes to how we can best work to facilitate this and encourage a longer-term outlook.’’
Read the digital edition of IPE’s latest magazine
No comments yet