Duties and “fiduciary duties”

Trustees have fiduciary duties, including acting in the best interests of beneficiaries. The duty of loyalty is paramount, requiring trustees to make decisions that prioritise the trust’s objectives. Trustees must balance returns against risks while promoting long-term financial stability.

Investment of the pension fund: Decision-making responsibility

Trustees rely on expert advisers but cannot delegate responsibility for final decisions. They must ensure that investment advice aligns with their strategy and take into account factors that advisers may overlook. Trustees must understand the broader economic and financial context when assessing investments.

“Financial” and “non-financial” factors

The Law Commission distinguishes between financial and non-financial factors. Financial factors are directly related to balancing risks and returns, such as market performance or climate risks. Non-financial factors, such as ethical concerns, can only be considered if they align with beneficiaries’ views and do not cause financial detriment.

Sustainability

Sustainability, particularly climate change, is a financial factor that pension fund trustees must consider. The report highlights that sustainability may reduce risk or improve long-term returns. Trustees must consider how sustainability impacts risk and return across different time horizons, with a focus on long-term stability. Climate change presents unique financial risks, such as litigation risks and transition risks as economies shift to low-emission models. Trustees must evaluate how climate change affects both specific investments and the broader portfolio. The report stresses the need for trustees to remain informed about evolving climate regulations and market responses.

Taking decisions as pension fund trustees with fiduciary duties

Trustees should approach decision-making carefully, ensuring they consider all relevant factors. They must consult experts and review strategies to ensure long-term financial health. Trustees are encouraged to look beyond immediate financial returns and consider the broader implications of their investments on sustainability and systemic risks.

“Numbers and narrative”

Decision-making should combine both quantitative data (e.g., projected returns) and qualitative analysis (e.g., sustainability risks). Trustees should not rely solely on numbers, as long-term climate risks may be difficult to quantify but still have significant financial implications.

Portfolios, and investing in pooled or passive funds

Trustees must monitor how investments, including pooled or passive funds, align with their strategies. They need to assess whether risks and returns are being managed effectively across their portfolios, ensuring that sustainability risks are factored into overall investment strategies.

Stewardship after the decision to invest

Once investments are made, trustees must ensure proper stewardship, using their influence to encourage responsible corporate behaviour. Sustainability should remain a focus post-investment, with trustees monitoring how their investments align with climate-related goals.

The time ahead

The report emphasises the importance of ongoing learning for trustees as the landscape of sustainability and climate change continues to evolve. Collaboration with other funds may help address large-scale climate risks that cannot be managed by a single pension fund alone.