22 February 2024, LONDON – During a session with the Work and Pensions Select Committee, Charlotte O'Leary, CEO of Pensions for Purpose, called for strong and widely socialised guidance for trustees on how fiduciary duty should be applied to systemic risks and opportunities, such as the climate crisis. Charlotte also called for changes to the Companies Act to more effectively align the responsibilities of company directors with goals that extend beyond maximising short-term profits.

The committee, chaired by Stephen Timms on 21 February, sought insights on adapting fiduciary duties in light of shifting market dynamics and environmental imperatives.

Misalignment

Charlotte's remarks were supported by other industry leaders, who highlighted a fundamental misalignment between pension funds and their advisers or managers in addressing climate change within their investment strategies.

Giving evidence, Charlotte said: "To have such a wide disparity between those that are investing in line with what we're trying to achieve from a climate change perspective to those that are not considering it at all, means there is something fundamentally wrong.”

Charlotte also pointed out trustees need to take investment periods into account, but also the varying time horizons of the savers they serve. "Trustees are there to honour the benefits of all of their members, youngest and oldest, and systemic risks and opportunities like climate change need to be viewed within that context," she stressed.

Legal framework

The session also featured discussions on the practicality and effectiveness of current legal frameworks, with a consensus emerging on the need for more explicit guidance to empower trustees. Charlotte advocated for changes to the Companies Act, suggesting an alignment of corporate responsibilities with trustees' efforts to address systemic risks and opportunities. "Pension funds are actors in a system, they aren't divorced from it, they can't make separate decisions,” Charlotte said, highlighting that decision-making processes should reflect this interconnectedness.

Not just a climate issue

Fiduciary duty is not just about climate change, which adds to the urgency with which legal revisions must be made according to Charlotte. "One of the biggest risks pensions face is a lack of contributions... At the moment we've got staggering gaps, particularly around gender. So you know, in terms of thinking about fiduciary duty, many things are not being addressed here."

Charotte’s comments following the session

After giving evidence, Charlotte added that, "The current interpretation of fiduciary duty significantly limits trustees' ability to consider the long-term impact of their investment decisions, particularly concerning climate change. We urgently need comprehensive guidance that includes trustees, advisers and asset managers to guarantee a cohesive strategy towards sustainable investment.”

She highlights the importance of the Better Business Act as a systemic lever for change, citing the Financial Markets Law Committee's (FMLC) report on fiduciary duties. "The FMLC’s report is instrumental in clarifying the current legal stance on fiduciary duty. However, to truly align our financial system towards sustainability, we need concerted efforts across the board," she remarked.

Charlotte outlined a three-pronged strategy for systemic alignment:

1. Provision of clear guidance to trustees by The Pensions Regulator.
2. Independent review of investment consultants and managers by the Financial Conduct Authority.
3. Revision of company director responsibilities to balance profit with the welfare of people and the planet, through amendments to Section 172 of the Companies Act, also known as the Better Business Act.

"Trustees are pivotal in our financial ecosystem, but expecting them to shoulder the transition to a sustainable system single-handedly is unrealistic. It is incumbent upon all of us, across the financial landscape, to support and drive this change," Charlotte emphasised.

 As the industry addresses these challenges with Parliament, Pensions for Purpose remains committed to leading the charge towards a more sustainable and inclusive financial ecosystem.

- ENDS -

Notes to Editors

About Pensions for Purpose

Pensions for Purpose exists as a bridge between asset managers, pension funds and their professional advisers, to encourage the flow of capital towards impact investment.

Impact investments are made to intentionally generate positive, measurable, social and environmental impact alongside a financial return.

Pensions for Purpose seeks to empower pension funds to make informed, sustainable investment decisions through our member Community, training, events, Impact Lens research and unique Knowledge Centre.

Press contact:
Material Impact Marketing Communications
Daniel Jason: dan.jason@wearematerialimpact.com

This item was covered in:

I&PE
Pensions Age
Professional Pensions