Pension funds ‘hide behind’ fiduciary duty on ESG

At a forum in London, BT Pension Scheme trustee director Donald MacDonald said pension funds use fiduciary duty as an excuse not to engage with ESG issues.

The way some pension funds interpret fiduciary duty as a focus purely on returns leads to ESG considerations being left off the table, according to Donald MacDonald, member-nominated director of the trustee board of the BT Pension Scheme and board chair at the Institutional Investors Group on Climate Change.

MacDonald was speaking this morning on a panel at the Sustainable Investing in Emerging Markets Forum in London, sponsored by the Financial times and EMPEA.

“My experience has been that pension funds in particular tend to hide behind a misconception about fiduciary duty as to why they will not be able to take E, S and G factors into account, and why they cannot take climate change and carbon and the whole food-water-energy nexus into account,” he said.

MacDonald said the way he looks at it is “actually the opposite”, that failing to take ESG issues into account where they may become material “could in itself be considered a breach of fiduciary responsibility”.

Fellow panellist Snaedis Ogn Flosadottir, managing director of EFIA and LSBI pension funds in Iceland, relayed a similar experience.

“We have had this problem in Iceland for the last couple of years that we are subject to a very strict law frame[work] and the fiduciary duty has been interpreted in a way that our only job is to maximise return, maximise profits,” she said.

However, EFIA and LSBI want to look at fiduciary duty in a different way, Ogn Flosadottir said.

“Our beneficiaries are planning to spend their retirement years on this planet, and they live in the society that we are investing in, so it is in their best interests that we invest responsibly and that we take ESG factors into account with all of our investment processes.”

Although significant progress has been made on this issue in recent years, there is still “inertia” in large parts of the industry, MacDonald said.

“I think all of us have a job to try and persuade our colleagues in the industry to be more proactive in this area.”

However, there are some pension funds in Europe that have made a definite move to include responsible investing within their definition of fiduciary duty.

Speaking on a panel at the seventh annual PEI Responsible Investment Forum in London in May, Anders Stromblad, head of external managers at AP Fonden 2, the second Swedish national pension fund, said the fund would not be doing its fiduciary duty if it were to fail to take ESG issues into consideration when evaluating managers.

“We put a lot of effort [into] manager selection. In fact, we will not invest in a manager if they don’t take ESG into consideration,” he said.