Fiduciary law ‘fit for purpose’ but investor knowledge needs to improve

Two submissions to the Law Commission on fiduciary duty say the law gives investment trustees the ability to consider environmental, social and governance (ESG) issues. However, trustees need to improve their knowledge of the law.

In his review of the investment world, Prof John Kay asked the commission to review fiduciary duty and see if the current law prevented investment trustees from taking other factors into account, such as ethical and environmental considerations. Submissions closed last week.

The Principles for Responsible Investment (PRI) Initiative’s submission argues that whilst the law is sufficient, many investors are cautious about considering other factors due to a lack of knowledge.

Its submission said, “We believe that the law is largely fit for purpose but that it is being understood and interpreted in a highly conservative way that is discouraging some actions which would be in beneficiaries’ interests. We therefore believe some consideration must be given to assisting building knowledge in this area and a healthier understanding and interpretation of the law.”

It added that too often a “safety-first culture” leads trustees to believe that they are constrained to take advice from a narrow set of adviser and follow a narrow path.

The PRI also highlighted how the review would impact on those that already consider ESG issues. Helene Winch, director of policy and research at the PRI, said, “For signatories of the PRI, who have agreed that ESG factors are key risks over the length of their investment horizon, this review is crucial.”

Consultancy firm Mercer takes a similar view, arguing that incorporating ESG into investment policies can be profitable and the under current laws is legal

According to Financial News, the organisation’s submission said, “The law as it currently stands does give trustees flexibility to consider ethical issues.”

Mercer noted that trustees who consider ethical issues could benefit financially. “Trustees might find it profitable to consider ethical issues as part of their risk and return framework”, the submission added.

The firm also argued that quarterly corporate reporting was leading to a short-term outlooks. The government has already confirmed it is committed to removing mandatory quarterly reporting for UK companies in its response to the Kay review. The response added that the government continues to make a case for removing the “rigid requirements”.

Both the UK Sustainable Investment and Finance Association (UKSIF) and the charity ShareAction have submitted responses calling on the Law Commission to clarify fiduciary duty in order to encourage sustainable and responsible investment.

Further reading:

UKSIF: current fiduciary laws leave investment trustees ‘confused’

Law Commission’s consultation on fiduciary duty closes

ShareAction calls for laws to encourage sustainable investment

Government response to Kay review outlines plans to modify equity market

Fiduciary responsibility in the context of a global emergency