Investment trustees should consider ESG factors, concludes Law Commission

In its final report on fiduciary duty the Law Commission has acknowledged that the current law on the issue is “confusing and inaccessible” and clarified that trustees can take environmental, social and governance (ESG) factors into account.

The commission closed its consultation on fiduciary duty in January, after receiving submissions from a range of organisations and perspectives. The latest report follows on from the Kay Review, which urged longer-term thinking in the investment world and recommended applying fiduciary standards to more people within the supply chain.

The report notes that taking ESG factors into account is designed to reduce risk and works on the approach that sustainable companies do better in the long term, a link that had been found in many research papers. As a result, the commission clarified that fiduciary duty does not mean that trustees can only consider financial information and added that it hopes to have finally removed the misconception that trustees cannot take into account ESG considerations.

The commission has also now accepted that smaller sized funds can practice good stewardship with their assets. This is an area that the UK Sustainable Investment and Finance Association  (UKSIF) has previously raised concerns about, along with the need for clarification to promote long-term sustainable investment.

Simon Howard, UKSIF chief executive, said, “We are pleased that the commissions has accepted the case for clarification. In particular we are glad that they make it clear that trustees should consider environmental, social and governance factors where they are financially material.

“Whilst we would have liked statuary clarification on this matter we look forward to working with The Pensions Regulator and Financial Conduct Authority in ensuring they provide rapid, comprehensible and accessible guidance in this area.”

Responsible investment campaign ShareAction described the Law Commission’s report as “helpful” but called for further clarification in statue. In its submission ShareAction said a more “holistic statement” on fiduciary duties should be provided.

Catherine Howarth, CEO of the organisation, commented, “We disagree with the Law Commission’s conclusion that codification would be unhelpful. We believe that codification in a permissive form would retain the flexibility for fiduciary duties to evolve and respect the discretion of trustees while providing the legal clarity which the Law Commission acknowledges is much needed.”

She added that one of the important developments in the final report was the acknowledgement that effective stewardship of investee companies is appropriate for institutional invests of all size.

Photo: Ken Tegardin via Flickr

Further reading:

Law Commission’s consultation on fiduciary duty closes

Fiduciary duty: are your investment fit for the future?

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

ShareAction calls for laws to encourage sustainable investment

MPs issue stark ‘carbon bubble’ warning to investors and finance world