The election of Donald Trump can’t help but feel like a setback for responsible investment. “Expect the election to herald a wholesale reversal of public policies addressing how corporations and investors tackle ESG rights and risks” said Global Proxy Watch.
As proponents of responsible investment develop their response to the election, one thing remains constant — expect the topic of fiduciary duty to remain on the agenda.
In a principal agent relationship, the agent acts on behalf of the principal. Fiduciary duties exist to ensure that those who manage other people’s money, act in the interest of the principal. In its simplest form, this requires prudent investment. Fiduciary duties do not respond to one election, but an evidence-base, years in the making. At a time of political turbulence, fiduciary duties move carefully forward.
Fiduciary duty requires investors to consider all value drivers, regardless of politics or ethics. If an issue is, or could be, financially material to portfolio value, investors must have a process in place to consider it. Integrating ESG factors into investment decision-making is part of the technology of investment analysis. There is no ambiguity.
It’s why pension funds around the world have added climate change to their risk register. And even if, as Donald Trump has promised, the US withdraws from the Paris climate agreement, other countries will not. US companies cannot be valued in isolation; their stock price is not subject to US policy-making alone. So climate change must be considered. Not least, because it is already disrupting company supply chains.
In 2015, the Department of Labor introduced Bulletin 2015-01, which clarified that ESG issues should be part of the primary analysis of investment decision making. “Keep politics out of our pensions”, said a handful of fringe US commentators. But they missed the point, the Department of Labor has and did. Prudent investment decision-making is not about politics.
The PRI, UNEP FI and The Generation Foundation have contributed an extensive evidence base to the topic of fiduciary duty, including more than 200 interviews with policy makers and investors and legal reviews by 12 law firms. Our report, Fiduciary Duty in the 21st Century, was launched in New York at Morgan Stanley’s Institute for Sustainable Investing. Our research on fiduciary duties in China was launched with a foreword from the chief economist of the research bureau at the People’s Bank of China.
Since their publication, we are preparing roadmaps in eight markets, including the US, to advance fiduciary practice. The roadmaps make a series of recommendations, both policy and practice, that will allow a fiduciary to fully integrate ESG risks. To do so, it is necessary to understand barriers through the investment chain, which start with corporate disclosure.
Corporate disclosure of ESG factors is a necessary, but not sufficient, condition for prudent investment. ESG disclosure is part of a company’s narrative on supply chain security, consumer demand and future value. We recommend companies disclose ESG factors in their annual report, independently assure all financial factors, and use common performance metrics to allow for comparability by industry, portfolio and across time-series.
Our roadmaps also make recommendations on effective shareholder engagement, sometimes referred to as stewardship. Shareholder rights are assets of the pension scheme to be used and monitored by fiduciaries in the best interests of beneficiaries. Corporate engagement is a long-term instrument; benefits accrue over several years. Stewardship practices should be a source of competitive differentiation, particularly among investment managers.
On the relationship between fiduciaries and their beneficiaries, our recommendations focus on the pension fund regulator. Rather than new regulation, in most countries it is clarification of existing regulation. For example, the UK Law Commission stated that “there is no impediment to trustees taking account of environmental, social or governance factors where they are, or may be, financially material”, which should be clarified in a revision of the UK investment regulations.
In prioritising our recommendations, the PRI, UNEP FI and The Generation Foundation is mindful of political feasibility. It would be wrong to say politics doesn’t matter.
In PRI’s analysis of the French Energy Transition Law, which requires investors to report on a portfolio’s carbon emissions, the PRI identifies political leadership as one of the five necessary conditions that enabled the law’s implementation. A change of government in the Province of Alberta presents an opportunity to extend Ontario’s pensions act, which requires Ontario-registered pension funds to disclose whether ESG factors are incorporated into a pension plan’s investment policies and procedures.
So politics matters but the essence of fiduciary duty remains unchanged. Investors must consider all long-term value drivers. It is not the origin of the factor, but rather its financial materiality which is of relevance. And that includes ESG factors, regardless of the ebb and flow of politics.
Will Martindale is head of policy at the Principles for Responsible Investment
