For many pension schemes outside of local government the conundrum around fiduciary duty is liable to linger, says ShareAction’s David Clarke

Can pension funds accommodate ethical concerns when making investment decisions? For many years this question has concentrated the minds of lawyers, investment advisors and trustees.

In advice published this week, Nigel Giffin QC confirmed that as long as there would be no financial disadvantage in doing so, local government pension funds could ditch particular holdings, like tobacco, on ethical grounds.

He said that if a case can be made for substituting a given investment for other holdings that can be expected to deliver the same financial returns, there is no legal impediment to removing that stock from the portfolio.

Mr Giffin’s answer paves the way for members of local authority funds to propose divestment from tobacco and other companies which they may object to on ethical grounds.

This is the latest in a series of interventions aimed at settling much confusion around this issue. In a lengthy consultation paper released last year, the Law Commission confirmed that “where trustees think that scheme members may hold a moral view, they may use this as a tie-breaker”.

Mr Griffin’s legal opinion is more than welcome but is unlikely on its own to clear up the confusion in trustee perceptions about the relationship between fiduciary duties and ethical considerations.

Many trustees doubt that their own interpretation of their legal duties is shared by fellow board members

A recent ShareAction survey of pension funds’ climate policies found that of the schemes who mentioned fiduciary duties in their response to the survey, half cited these duties as a reason for acting on climate change while the other half felt that fiduciary duties prevented them from doing so. Another poll found that many trustees doubt that their own interpretation of their legal duties is shared by fellow board members.

This narrow thinking actually risks undermining beneficiaries’ interests in the long term

It remains common for trustees to interpret their fiduciary duties as requiring an exclusive focus on short-term returns at the expense of wider factors including members’ ethical concerns. This narrow thinking actually risks undermining beneficiaries’ interests in the long term. In his review of UK equity markets, Professor Kay found an unduly short-termist dynamic is “not conducive to investment strategies that serve beneficiaries’ best interests”.

To address this problem, ShareAction has argued for legislative clarification of trustees’ duties. It should be explicit in law that funds may consider a wide range of factors when making investment decisions in the best interests of fund members. Statutory clarification would provide the unambiguous signal needed to end this long-term confusion and allow funds to take an enlightened view of their legal duties to members.

For many pension schemes outside of local government the conundrum around fiduciary duty is liable to linger

Nigel Giffin’s opinion will, no doubt, go some way to addressing the confusion for an important group of local authority pension funds. However, for many pension schemes outside of local government the conundrum around fiduciary duty is liable to linger until clarity is provided in law.

While such confusion remains, we fear it will continue to undermine beneficiaries’ interests and deprive fund members of legitimate opportunities to have their views reflected in investment decisions.

David Clarke, policy officer, ShareAction

Topics