UK Aims to End Uncertainty on Fiduciary Duty

Green Finance Strategy outlines the government’s plans to align the finance sector with its net zero commitments.  

A commitment to review pension trustees’ fiduciary duties and stewardship activities in the UK’s updated Green Finance Strategy has been welcomed by industry experts.

The long-awaited strategy acknowledged that pension trustees would like further information and clarity on the “latitude” of their fiduciary duties in the context of the transition to net zero and broader stewardship activities.

It confirmed the Department on Work and Pension’s (DWP) plans to examine the extent to which its 2022 stewardship guidance is being followed in Q3, a review which will now be complemented by a working group of the Financial Markets and Law Committee (FMLC), where participants, including DWP, will examine ongoing issues around fiduciary duty and consider what further action is needed.

“Pension funds’ fiduciary duties relate deeply to the interlinked areas of the transition to net zero and investors’ stewardship activities, as well as how investors address broader sustainability issues, such as biodiversity and social issues,” Ellie McLaughlin, Senior Policy Officer at UK NGO ShareAction, told ESG Investor.

However, “trustees remain unsure on the extent to which their duties align with addressing climate change”, with “even greater confusion around if they can act on social factors”, said McLaughlin.

“Largely, this stems from the issue that in the law the fiduciary duties of trustees remain focused almost exclusively on financial terms – there is a real lack of clarity as to how trustees are permitted, or required, to act on sustainability factors where the financial case is harder to make.”

In the absence of more explicit guidance and direction on fiduciary duty, asset owners and asset managers “may remain hesitant to use investment decisions, stewardship and policy engagement to pursue positive sustainability impacts,” agreed Eliette Riera, Head of UK Policy at the UN-convened Principles for Responsible Investment (PRI).

According to the updated strategy, a series of roundtables will be held later this year to engage with interested stakeholders on how the government can continue to clarify fiduciary duty.

“These reforms should address both the legal duties investors are subject to and the circumstances in which those duties are applied, which includes sustainable finance policy frameworks and standards,” Riera said.

The PRI has previously published its policy recommendations on investors’ legal duties around sustainability-related themes, including clarifying that purpose-related requirements entail the consideration of sustainability impact goals.

ShareAction’s McLaughlin added it would be helpful if pension regulations “explicitly” require trustees to consider the impact of their investment activities on sustainability factors, and the views of their beneficiaries’, when making investment decisions, and ensure that the law is supportive of them doing so.

But Paul Lee, Head of Stewardship at investment consultancy firm Redington, questioned the need for further clarity.

“It’s clear to me that fiduciary duty expects [pension] trustees to consider all material risks to long-term investment performance, and to include relevant considerations in their investment approach; climate change is certainly both material and relevant,” he told ESG Investor.

However, Lee said that the approach of convening roundtables to consider the issue of fiduciary duty uncertainty and for the FMLC to take this work forward “seems right”.

“If there is a problem, its solution will be a legal one, so the FMLC is a sensible vehicle for considering it,” he said, adding that the FMLC has the “appetite to do the work, the right people in the room, and a real capacity to deliver”.

Definition and evaluation 

The strategy confirmed that the Financial Reporting Council (FRC), alongside the DWP, Financial Conduct Authority (FCA) and The Pensions Regulator (TPR), will be reviewing the UK’s whole regulatory framework for effective stewardship in Q4, including the operation of the Stewardship Code.

As well as considering whether the Code is “creating a market for effective stewardship”, and whether there is a need for further regulation in this area, the review will also consider ways to evaluate and communicate the efficacy of stewardship activity and outcomes, the need for common language for stewardship (such as defining engagement), and the evolving expectations for stewardship across asset classes other than listed equity.

Depending on the outcome of this review, “further action” to ensure the effectiveness of the regulatory framework for stewardship may be necessary, the strategy said.

“We welcome plans from the FRC to review, not only the Stewardship Code, but also the broader regulatory framework relevant for stewardship activities,” said Riera, who confirmed the PRI is working with the FRC on this review.

She noted that the review should increase focus on the quality and results of the stewardship activities conducted across the entire portfolio, moving beyond “anecdotal information and case studies”. It should further enhance the comparability of stewardship reporting, “so that clients, beneficiaries and other stakeholders can make an informed comparison of the stewardship practices of different investors”.

Redington’s Lee said this is “very helpful and positive and is certainly helping trustees to refresh their thinking on the issue and consider if they should be doing more.

“I think it will still be early days for the new guidance when the review comes later this year, but I’m sure it will find that trustees are taking it seriously and are starting the process of holding their managers to account more effectively to account for delivering effective stewardship,” said Lee.

A suite of promises 

The updated Green Finance Strategy represents the UK government’s efforts to mobilise billions of private investment needed for net zero and nature recovery.

Its release was accompanied by a range of other announcements relating both to the government’s plans to reach net zero and align finance with sustainability objectives.

As well as planning to publish a series of net zero investment roadmaps and a nature investment roadmap, the government said it will consult on its delayed Green Taxonomy in the autumn and launch a call for evidence on Scope 3 reporting.

The government will continue to support the work of the International Sustainability Standards Board (ISSB), the strategy added, announcing plans to set up a framework to assess its climate and general sustainability standards for their “suitability for adoption in the UK” as soon as they are finalised.

The UK regulators announced their support for the ISSB standards, with FCA CEO Nikhil Rathi noting they are “putting the right information in the hands of investors by working closely with the ISSB”.

Following the completion of the Transition Plan Taskforce’s (TPT) ongoing work, which is expected to be finalised later this year, the government will consult on the introduction of requirements for the UK’s largest companies to disclose their transition plans.

“Making net zero transition plans mandatory for all large businesses would send a powerful message that all businesses need to play their part in the net zero transition and would help us make better informed capital allocation, stewardship and risk management decisions to decarbonise our portfolio is a way that maximises financial benefit to our 12 million customers,” said Dr James Wilde, Chief Sustainability Officer of Phoenix Group, the UK’s largest long-term savings and retirement business.

The government further plans to set out further detail on the Sustainability Disclosure Requirements (SDRs) implementation timeline, which the FCA pushed back, reflecting the “rapid development of international standards”.

There are also plans to engage stakeholders on an update to the Environmental Reporting Guidelines, to publish a report detailing the environmental impacts and social co-benefits from the expenditures of the Greening Financing Programme, and to work with UK financial institutions on a series of government-convened roundtables to further tackle deforestation-linked finance.

Overall, the UK’s Green Finance Strategy is “lacking the vision and ambition needed to align the financial sector with the government’s own ambition of reaching net zero,” said ShareAction’s McLaughlin.

“We had hoped for something bold and visionary, but this amounts to little more than a restatement of existing commitments.”

Read more articles like this on Regulation Asia’s sister publication, ESG Investor.

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