I tried to watch this parliamentary debate on fiduciary duty but lost heart

I find this debate rather bizarre.“Fiduciary Duty” does not call out climate, nature, or social risks specifically, but it doesn’t call out any other specific risks either because it doesn’t need to.

These can easily be inferred from a natural reading of the common law duty, supplemented by various reports and regulatory guidance on the subject, not to mention legislation and regulation which make these explicitly clear to trustees.

Let’s start with the common law and what it actually says (rather than what some lobbyists and commentators think it says or should say).

A trustee has a common law fiduciary duty to act in the best interests of the beneficiaries of the trust.

This duty involves several key responsibilities, including:

1. Duty of Loyalty: The trustee must act honestly and in good faith, putting the interests of the beneficiaries above their own interests or those of any other parties. They must avoid conflicts of interest and disclose any potential conflicts that may arise.

2. Duty of Care: The trustee must exercise the same level of care and diligence that a prudent person would exercise in managing their own affairs. This includes making informed decisions, conducting due diligence, and monitoring the performance of investments.

3. Duty to Diversify: Trustees are typically required to diversify the investments of the trust to minimise risk. This involves spreading investments across different asset classes, industries, and geographic regions to protect the trust from market volatility.

4. Duty to Act Prudently: Trustees must make investment decisions with the goal of achieving the best possible returns for the beneficiaries, taking into account the trust’s specific investment objectives, risk tolerance, and time horizon.

To assist in the interpretation of the common law fiduciary duty in relation to ethical or environmental, social or governance (ESG) issues, the Law Commission published a report on the subject on 1 July 2014. The report concluded that trustees should take into account factors which are financially material to the performance of an investment.

Where trustees think ESG issues are financially material they should take them into account.

Against this legal background and taking into consideration the huge body of scientific and financial analysis of the impact of climate change in the public domain it is hard to see how a trustee could either conclude that climate change does not pose a financially material risk to a scheme’s investments, which should at least appear on its risk register, or reasonably decide that steps to mitigate that risk are unnecessary.

Any regulator worth its salt should be asking such trustees very difficult questions, and that requires no change in the law or any new guidance. The time for further “education and enablement” is long passed – now is the time to get on with “enforcement”.#fiduciaryduty #trustees #esg