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The dangers of codifying fiduciary duty

Fiduciary duty is a vague concept under UK common law that can be used in arguments both for, and against, sustainable investing.

This confusion, and divergent opinions on whether it is a help or hindrance to environmental, social and governance (ESG) advocates, as well as those arguing for pension funds to be long-term investors, was one of the reasons last year’s Kay Review of UK equity markets called for the Law Commission to offer its view.

Vince Cable, the UK business minister ultimately charged with accepting the Commission’s findings, has indicated that we could see a definition of fiduciary duty on the statute books. Sustainable investment lobby group ShareAction has meanwhile welcomed the explicit reference to ESG investing in the terms of reference, with head of policy and research Christine Berry saying that the lack of clarity was the “nub of the concerns” she had with the current interpretation.

Roger McCormick, director of the Sustainable Finance Project with the London School of Economics’ Department of Law admits that the underlying debate is “too serious” to continue without clarity.

“You can’t expect trustees to take risk in this area if the law isn’t clear – they are not going to be interested in sticking their necks out,” he says.

He notes that while some argue in favour of sustainability-themed investing, there remains a “fear” that those advocating such a step are driven by an “understandable desire to promote the ESG agenda”.

McCormick, nonetheless, shies away from endorsing a codification of fiduciary duty. “Even if you codify it, you are going to have to build in quite a lot of flexibility because it is a question that, by its nature, needs to allow the courts to let the law develop according to the way commercial and financial behaviour develops.

“It’s very difficult to lay down a hard and fast rule that will work for decades to come,” he admits.

It is questionable whether fiduciary duty can “emerge as the panacea”, as McCormick puts it, as individual problems will require individual solutions.

However, he endorses the Law Commission’s work, which he says will be followed by a politicised debate – something he views as unavoidable, but which he says would at least be “enlightened” due to the ongoing work.

“You have to break the questions down in a more analytical fashion,” he concludes, “almost forget the label ‘fiduciary duty’ and focus on what the substance of the duty should be.”

This attitude would probably be welcomed by the new head of the Investment Management Association (IMA). In a recent speech, Daniel Godfrey spoke of fiduciary duty as a “moral code, a way of behaving, a form of conduct”.

To Godfrey, the ‘substance’ of fiduciary duty includes the overdue recognition of the importance of all the parties involved in the investment chain, and the acknowledgement that real people are at the end of each investment decision made on behalf of pension funds.

Berry welcomes the IMA’s entry into the fiduciary debate as a major step forward – coming on the heels of both the Kay Review and work by ShareAction itself, in its former guise as FairPensions.

She is less certain what to make of Godfrey’s attempt to distance the role of the fiduciary from its legal origins. “To me, fiduciary duty is a legal concept,” she says. “I have to say that I’m suspicious of efforts to separate debate about fiduciary standards of care from that legal concept, because I think that can become slippery.”

The Law Commission is set to deliver its verdict next summer, offering clarification on a raft of matters and potentially freeing pension schemes – in accordance with the terms of reference provided to the Commission by the Department for Business, Innovation & Skills – to consider and even make investment decisions based upon factors that are not in the immediate financial interests of beneficiaries.

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