ShareAction’s report outlines the necessity for investors to rediscover the meaning of fiduciary duty, with attention to policy challenges faced by pension scheme trustees such as preventing another financial crisis, providing for an ageing population, and moving towards a low-carbon economy. The barriers to incorporating responsible investment is discussed, as well as the challenges in seeking beneficiaries’ environmental, social, and ethical interests.

The research is divided into six parts:

Section 1 details how the meaning of ‘fiduciary obligation’ has been manipulated and moulded over time, and that core elements must be once again considered. The two main components of fiduciary duty; the duties of loyalty and prudence, have been misinterpreted to a point where investors believe their only obligation is to ‘maximise returns’. It is necessary to evolve this meaning of fiduciary obligation in the current economic framework, to mitigate systematic and extra-financial risks.

Section 2 discusses the breadth of fiduciary obligations, and if they extend beyond trustees. Pension scheme trustees are held to strict fiduciary duties, but the asset managers and investment consultants whom they delegate crucial decisions to fall under a grey area. Both managers and consultants influence decisions of trustees, making the case that they should be legally regulated as a fiduciary. A significant shift from trust-based to contract-based pension arrangements has resulted in less fiduciary policy. ShareAction push for a more appropriate regulatory framework universally, for all pension arrangements.

Section 3 outlines potential barriers to responsible investment, and how these challenges might be overcome. There is an increasing acceptance that serving beneficiaries’ best interests requires the consideration of environmental, social and governance (ESG) issues, with the potential to affect financial returns. However, the absence of long-term incentives motivates investors to towards short-term business benchmarks, thus overlooking the long-term benefits of ESG risk management. Further, there is still a misconception that responsible investment is a client-driven ethical preference rather than an integral part of financial analysis. There is confusion over the nature of fiduciary duty, and the concept of ‘somebody else’s problem’ hinders ESG integration.

Section 4 focuses around trustees’ ability to consider beneficiaries’ ethical and social interests. ShareAction argue that the Cowan v Scargill case exemplifies that a trustee is not legally restricted to interpreting their fiduciary duty in terms of financial interest, but rather motivated by the beneficiaries’ best interests. However, current legal framework does not explicitly prescribe how trustees might incorporate non-financial interests.

Section 5 is concerned with transparency, accountability, and involvement, alluding that best interests has historically been established for the trustee rather than the beneficiaries themselves. Studies argue that people value communication and consultation, and that a lack of engagement is not in the beneficiaries’ best interests.

Section 6 deliberates over lessons from the Companies Act for institutional investors. The report acknowledges that the current economic landscape in which global institutions are the primary fiduciaries is sub-optimal. However, the Companies Act 2006 provides a useful model in which company directors must ‘have regard’ to the longer term, referencing to an ‘enlightened approach’ for investors.

A fundamental review of the fiduciary obligations of investors can help contribute to achieving stable and sustainable economic growth.

1. It is not just our understanding of what fiduciary obligation is that needs to change, but also our understanding of who is a fiduciary. Regulators should clarify the legal responsibilities of both asset managers and investment consultants towards clients and their beneficiaries.
2. Rise of 'agency capitalism' is inconsistent with the fiduciary concept. There is an urgent need to consider how fiduciary standards can be achieved, not just by trustees, but by all those responsible for managing other people's money.
3. Current interpretations of fiduciary obligation neglect core principles such as duty of loyalty and duty of prudence, in favour of a focus on maximising returns.
4. Increasing acceptance that sustainability and other environmental, social and governance (ESG) factors can affect returns presents an opportunity to tackle the perverse incentive structures and misunderstandings of fiduciary obligation which continue to hold back responsible investment in practice.
5. Fiduciary obligation is invoked disproportionately to justify neglect of ESG issues, but neglect of ESG issues rarely gives rise to accusations
   of breach of fiduciary duties.
6. A prudent ethical investment policy, which does not compromise beneficiaries’ financial interests and is firmly rooted in their own ethical views, ought to be possible both legally and in practice. But the legal position remains unclear, and statutory clarification may be needed to restore common sense to the law and resolve a debate that has generated more heat than light.
7. Pension fund members should have more control in how their money is managed, as they have invested all the capital and bear all the investment risk.
8. Pension fund members who enquire about an ethical issue often encounter the seeming paradox of being told that their views must be ignored because of the trustees’ fiduciary duty to act in their best interests. But are trustees legally restricted to interpreting this duty only in terms of financial best interests?
9. There is a necessity to align legal framework governing investors with the 'enlightened shareholder value' ethos underpinning the duties of company directors, encouraging a responsible, long-term approach to serving beneficiaries' interests.
10. Debates over the role of investors in the wake of the financial crisis suggest a need to look beyond beneficiaries. Collectively, pension funds are now important actors and universal owners in the global economy. The fiduciaries of today include giant institutions whose decisions have a very real impact on the economy, society, and environment. Does this impact justify granting rights to other stakeholders beyond the beneficiaries to whom fiduciary obligations are traditionally owed?