The Law Commission should carry out an urgent review of its guidance on fiduciary duties with a view to removing an unhelpful distinction between financial and non-financial factors and supporting collective engagement, according to actuaries and investment consultants.
Law Commission guidance regarding the fiduciary duties of UK pension scheme trustees has been developed over the course of two major reports, “Fiduciary Duties of Investment Intermediaries” in 2014, and “Pension Funds and Social Investment” in 2017”.
In a joint response to a consultation seeking ideas for the statutory body’s next programme of law reform, the Institute and Faculty of Actuaries (IFoA) and the Investment Consultants Sustainability Working Group (ICSWG) said the Commission’s guidance created “a false dichotomy between financial and non-financial factors”.
By way of the confusion this created on the part of pension trustees, this distinction could ultimately be harmful for the long-term outcomes for pension schemes members, “not to mention wider society,” the IFoA and ICSWG argued.
Citing “A Legal Framework for Impact”, a recent report produced by law Freshfields Bruckhaus Deringer, the actuaries and consultants said current thinking was that “the fundamental basis of the split between financial and non-financial is flawed”.
They also said the Law Commission’s reports did not support stewardship, which was at odds with both subsequent regulations and the understanding of its vital role.
“A function of long-term systemic risks, such as climate change, is that the fiduciary duty to manage them can only be effected through stewardship, particularly collective collaborations,” wrote the IFoA and ICSWG.
Investor purpose, future quality of life, double materiality
Their specific recommendation is for the Law Commission to carry out an “urgent review” – focussing specifically on pensions – into its 2014 report. This should take into consideration the developments in the understanding of climate and sustainability risks and increased stewardship expectations and regulation.
Rather than working with the notion of there being financial and non-financial factors, the focus of the review should be on investor purpose and where there is a key objective of achieving a sustainability impact goal, said the IFoA and ICSWG.
They suggested the Law Commission incorporate the concept of double materiality, saying it had been gaining traction in sustainability policy discussions.
“[I]f investors exacerbate social and environmental issues, this can in turn increase the impact that the issues have on their investments,” the professionals groups wrote.
They said the legal framework needed to support stewardship of assets, particularly through collective collaborations, and also recommended that the Law Commission should “consider how investors can be encouraged to consider future quality of life within their fiduciary duties”.
The Law Commission is a statutory body responsible for keeping the law of England and Wales under review, and recommending reform where it is needed. The ICSWG was only set up last year, with the aim of seeking to improve sustainable investment practices across the investment industry.