There’s no escaping the fiduciary duty of creating a better world

ESG, and more recently climate change, are now largely accepted in the investment vernacular and process, and more importantly have passed the fiduciary duty test. What then is next in terms of fiduciaries’ responsibilities to the world? Does it extend to labour markets, gender equality or the economics of peace?

While the job of integrating ESG and climate change, risks and opportunities, into the investment universe is far from over, the dialogue is developed enough to have captured the attention of the more progressive product providers and asset owners.

The war was won when the economics of the argument made sense. Markets took over and analysts now routinely factor in these newly categorised, but already considered risks (fraud, for example, is considered the worst “governance” outcome, but already a concern in assessing the risk of a company).

Similarly, other battles will be fought over economics.

The Norwegian Government has been a world leader in mandating a 40 per cent quota of women on boards of all public companies, and a number of European countries are following the lead. There’s also the 30 per cent club in the UK, and the Deutsche Bank-sponsored Women on Wall St among the private groups rallying behind the issue. Again the economics of the argument will become the clincher. If the studies can continue to prove that companies perform better with equal board representation, the “movement” will grow.

While the issue of gender diversity is worth fighting for, more broadly women also play a role in some of the more critical issues facing the planet. Many aid agencies go to local women to help enforce change.

A recent investment presentation from a “thematic” investment manager highlighted some of the pervasive problems in the world today.

A couple of them are worth noting: the rich are getting richer – for example, the top 10 per cent of earners in the US receive about half of the total income; and serious food and water shortages are not abating.

But should food and water shortages, poverty and crime really just be an opportunistic investment play by investment managers? What responsibility do asset owners have in creating a better world?

Since the mid-1980s the World Bank has been focused on the need to strengthen savings systems that provide old age income support in developing countries.

In its Pension Reform Primer it says: “Such support has also been driven by pressures of global population aging, the erosion of informal and traditional family support systems, and weaknesses in the governance and administration of existing pension systems.”

(These problems do not sound unique to developing nations.)

It wasn’t that long ago that asset owners were using the “fiduciary duty” test as an argument for avoiding socially responsible investing. An interesting paper can be viewed here.

So what about the fiduciary duty argument: is it just an excuse, a way out of considering investments in a wider humanitarian context?

Two of the fiduciary responsibilities, as set out by the United States Department of Labor (under the basic rules of the Employee Retirement Income Security Act) are:

• Acting solely in the interest of plan participants and their beneficiaries and with the exclusive purpose of providing benefits to them;
• Carrying out their duties prudently.

Already investors around the globe, pension funds and sovereign wealth funds exclude companies that produce or sell weapons, violate human rights, violate fundamental humanitarian principles, or produce tobacco.

So is escaping poverty, or the right to live peacefully, a “fundamental humanitarian principle”?

According to a World Bank Report, “Old-Age Income Support in the 21st Century: An International Perspective on Pension Systems and Reform”, most public pension schemes were not designed to deliver current benefit levels when confronted with today’s major demographic and economic changes. Therefore, keeping existing systems afloat will require either cutting public spending on health and education, or cutting pensions drastically for the next generations of elderly. It says if problems like these are not solved, falling economic growth and greater poverty may be the end result.

If acting in the best interest of the next generations of elderly does not fit into the definition of the fiduciary duty of a pension fund, then I’m not sure what does. It seems whether pension funds like it or not, they are tightly wrapped up in the future of the world.