Focus on sustainability will help trustees meet fiduciary duties, says FMLC

February 8th, 2024

The Financial Markets Law Committee (FMLC) has published a review on pension fund trustees’ fiduciary duties in relation to sustainability amid widespread uncertainty in the industry.

Uncertainty over how trustees should approach sustainability was highlighted by responses to the UK government’s call for evidence on pension trustee skills, capability and culture last year.

The FMLC report, Pension Fund Trustees and Fiduciary Duties: Decision-making in the context of Sustainability and the subject of Climate Change, outlined the importance of sustainability and climate change to pension funds.

The FMLC – an educational charity focused on financial law – works to identify issues of legal uncertainty or misunderstanding within financial markets which may give rise to material risk and considers how to address these issues.

It noted: “Sustainability is integral to decision-making by pension fund trustees where it may affect financial return or risk… Sustainability may reduce risk or improve return… Within that framework, sustainability is therefore for consideration in all pension schemes.

“The relevant entry point for consideration of sustainability in the context of pension funds is as a financial factor rather than as a non-financial factor.”

The report has been published to provide a general explanation of the legal position, uncertainties and difficulties in relation to sustainability in terms understandable to pension fund trustees. However, the FMLC said it should not to be relied on as advice.

The FMLC added: “If pension fund trustees approach their fiduciary obligations today in the context of sustainability and the subject of climate change and with advice and assistance, their approach can be expected in turn to inform how investees measure success and identify, address and monitor risk and return.

“That – and related increased transparency – may in turn help pension fund trustees still further to meet their fiduciary obligations.”

Claire Jones, head of responsible investment at LCP, said: “[The report] should go a long way towards clearing up the uncertainty which has hindered this complex topic.

“The FMLC has highlighted a wide range of factors that are potentially relevant to trustees’ investment decisions, going far beyond those which have traditionally been considered.”

James Alexander, CEO of UKSIF, said: “The guidance… delivers much needed clarity on fiduciary duty.

“This guidance sends a clear message that ESG risks, and particularly climate change, present serious financial risks that should be considered by fiduciaries as part of standard investment practice, taking long and short-term investment horizons into account.”

David Crum, managing director for asset owner solutions at Minerva Analytics, said: “The negative aspects of climate change are likely to impact every business sector, and this report confirms it should be addressed from both a top down, or fund level, and bottom up, or asset level perspective.”