What does the legal obligation on trustees to act in the best interest of their scheme’s members mean in the context of the need to manage the world’s environmental and social challenges? Why – and how – might pension funds consider their impact on people and planet alongside seeking a financial return?
Together with our panellists Mark Walker, Chief Investment Officer at Coal Pension Trustees, Denise Le Gal, Chair of Brunel Pension Partnership and Melanie Cusack, Client Director at PTL, a provider of independent trustee and governance services, we discussed how fiduciary duty as a concept has not changed, but our world has.
Key messages from the discussion
- Everything we invest in has impact: good or bad, sustainable or not. A fiduciary’s understanding of how to achieve the best outcomes for their members has had to shift. Ensuring financial returns now includes consideration of all sorts of new factors – new risks, in the form of urgent crises like climate change and the coronavirus, and new opportunities as well. And the importance of these factors is only going to grow. It is also a fiduciary’s duty to consider what their members expect from them as custodians of their savings and their mindset may be different if they knew whether or not their members appreciated where their money is being invested.
- Ground investment decisions in principles and focus on the long-term. It is easy to get hung-up on established measures of risk, return, growth etc. but these are all measures of the past; they can’t predict the future and many, like GDP, are increasingly considered no longer fit for purpose. Long-term objectives can accommodate short-term changes and better manage risks. The coronavirus pandemic has tested this and we will see whether those who ‘sat on their hands’ and treated it as a cycle will suffer less extreme negative impacts on their portfolios than those with short-term strategies. Another way of looking at the issues is being outcomes- and impact-focused, with the intention to get things mostly right rather than precisely wrong!
- Fiduciaries can use their voice to influence both the performance of their investments and the wider policy environment. The current government is willing to make policy changes but this has not happened without pressure. It is a collective responsibility to bring about change. Similarly, fiduciaries also have a role in using their voice, through their share of investee companies, to improve the behaviour and sustainability of those companies. Although stewardship and advocacy may seem easier for bigger schemes, smaller schemes also have the power to make a difference – they can set expectations with their investment consultants, fiduciary managers and asset managers and work collectively with other shareholders.
- There are steps that fiduciaries and the industry can take now. We need to find a common language to avoid the risk of polarisation of opinions and encourage action. The Impact Investing Institute has published Four Good Governance Principles for Pensions to help establish a common understanding and suggest actions that can be taken forward now. And as mentioned by Denise Le Gal, the three important things for pension trustees to do are: be Agile, be Adaptable, and remain Authentic!