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The Sustainability of Fiduciary Duties

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Talk given by Paul Watchman, CEO - Quayle Watchman Consultancy - UK

Talk given by Paul Watchman, CEO - Quayle Watchman Consultancy - UK


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  • 1. THE SUSTAINABILITY OF FIDUCIARY DUTIES Triple Bottom Line Investing (TBLI) Conference Paris November 9 – 10, 2006 Paul Watchman
  • 2. UNEP FI Report
  • 3. UNEP FI Report
    • “ A legal framework for the integration of environment, social and governance issues into institutional investment”
    • “ Significant landmark in the discussion and evolution of initiatives related to the complex interaction of capital markets and responsible companies.”
    continued 
  • 4. UNEP FI Report
    • “ Critical supplement to the PRI (Principles of Responsible Investment) work and takes an important step to further embed environmental, social and governance issues into investment thinking”
    • “ [The Report] has contributed in a most significant way to the advancement of the debate around responsible corporate behaviour and the role of the investment community and for this you should be congratulated.”
    continued 
  • 5. UNEP FI Report
    • “ This is not an advocacy paper but a 150 page boring legal opinion which does not seek to justify the position of the UNEP FI or any other interested parties”
    • “ The Report states the bleeding obvious”
    • “ More important than the Turner report on pension reform”
    • “ Brings ESG [Environmental Social and Governance issues] into the mainstream of investment decision-making”
    • “ Empowers pension fund trustees to do the right thing”
    continued 
  • 6. UNEP FI Report
    • “ Institutional investors who hide behind profit maximisation and the limits supposedly placed by their legal duties as fiduciaries do so at their own peril. There is no legal bar to the integration of ESG considerations into investment decision-making (provided the focus is always on the beneficiaries best interests) and indeed failure to have regard for such considerations where there is a proven link between an ESG consideration and investment value may itself amount to a breach of fiduciary duties by the pension fund trustee or on his behalf by an asset manager.”
  • 7. Background to the UNEP FI Report
  • 8. Background to the UNEP FI Report
    • The legacy of Milton Friedman:
      • “ Business of business is business”
    • The legacy of the Chicago School of Law and Economics:
      • Richard Posner and John Langbein create new legal tests for fiduciaries not required by US courts or other distinguished trust law and pension fund commentators
    continued 
  • 9. Background to the UNEP FI Report
    • A legacy of the miners strike:
      • Cowan v. Scargill
      • The vanity of the NUM leader
      • Judgment of Mr. Justice Megarry according to Mr. Justice Megarry was misinterpreted by lawyers and the pension fund industry to place unnecessary restrictions on investment powers of pension fund trustees
    continued 
  • 10. Background to the UNEP FI Report
    • Goldman Sachs, UBS, ABN Amro and others:
      • Research for UNEP FI shows link between environment, social and governance (ESG) and financial health and vitality of companies
      • Pension funds resist UNEP FI findings and cite fiduciary duties restrictions
  • 11. UNEP FI Report
    • Remit by UNEP FI
    • “ If and, if so to what extent, it was consistent with the fiduciary duties of pension funds and the responsibilities of mutual funds and insurance companies to have regard to environmental, social and governance decisions in making decisions whether to acquire, retain or divest investments.”
  • 12. UNEP FI Fiduciary Duties Study
    • Approached because of work done on CSR, human rights and the equator principles
    • Pro bono project for Freshfields
    • 40 plus lawyers worldwide led by Paul Watchman, Lucas Shipway and Jane Anstee-Wedderburn
  • 13. UNEP FI Report Study
  • 14. UNEP FI Report Study
    • Common law countries, states, provinces and other legal jurisdictions:
      • United States
      • United Kingdom
      • Canada
      • Australia
    continued 
  • 15. UNEP FI Report Study
    • Civil law countries:
      • France
      • Spain
      • Japan
      • Germany
    continued 
  • 16. UNEP FI Report Study
    • Countries or regional governments which recognise ESG explicitly in primary or secondary legislation as relevant and material investment considerations:
      • United Kingdom
      • France
      • Germany
      • Canada (Manitoba)
      • Australia
      • “ Italy”
    continued 
  • 17. UNEP FI Report Study
    • What is the nature of the duties of a fiduciary trustee?
    • Fiduciary duties are organic and respond to changes in society
    • Examples:
      • Equal pay for women for equal work held to be an unlawful breach of fiduciary duties
      • Encouraging provision for disabled people on public transport held to be unlawful breach of fiduciary duties
      • Pricing public transport fares to discourage the use of cars in city centres held to be an unlawful breach of fiduciary duties
    continued 
  • 18. UNEP FI Report Study
    • What are the fiduciary duties of a pension fund trustee?
      • Duty of loyalty
      • Duty of prudence
      • Duty to act fairly
      • Duty to act in the interests of all beneficiary classes and balance interest between beneficiary classes, including present and future contributors and beneficiaries
      • Duty to spread risk according to modern portfolio theory
      • Duty not to crusade unless a bona fide crusader
      • Duty to take a long term not short term or medium view
    continued 
  • 19. UNEP FI Report Study
    • Approach of the courts to fiduciary duties of pension fund trustees
      • Courts recognise that valuation and investment, notwithstanding the use of mathematical and scientific and economic modelling, is an art not a science.
      • Courts concerned with process, not whether the decision is the best decision
      • Courts expect that pension funds will diversify investments and that modern portfolio theory will be applied to spread risk
      • Courts will not second guess business decisions
    continued 
  • 20. UNEP FI Report Study
      • Courts will not accept blanket policies or political pursuits based on political zeal rather than investment principles
      • Courts give wide discretion to pension fund trustees and asset managers within the penumbra of fiduciary duties
      • Courts do not expect pension fund trustees to be experts but do expect them to seek expert advice
      • Courts do not regard prudence as a strict mistress but someway short of a fun time girl
  • 21. Conclusions of the Study
  • 22. Conclusions of the Study
    • The view associated with Friedman and the Chicago school that investment profits must be maximised and ESG considerations rejected as an unlawful breach of fiduciary duties is wrong and is not based on an analysis of case law or legislation.
    continued 
  • 23. Conclusions of the Study
    • ESG considerations are mainstream investment considerations not SRI niche
    • Where there is evidence that there is a relationship between value and a consideration it should be taken into account
    • For example:
      • Climate change and the insurance & reinsurance, oil & gas, automobile manufacturers and real estate industries
      • Child labour and the clothing and food & drink industries
    continued 
  • 24. Conclusions of the Study
    • Human rights and the clothing, food, retail and electrical and electronic industries
    • Good governance and all industries
    • Where a decision is made on political or ethical values rather than value there is a danger that fiduciary duties may be breached
      • There is an exception for moral and other crusaders, such as churches, charities and political funds
      • Otherwise no crusading: decisions should be based on investment value not moral values
  • 25. Principles of Responsible Investment (PRI) (UNEP F1 & UN Global Compact)
  • 26. Principles of Responsible Investment (PRI)
    • Pension fund, mutual fund and insurance industries valued at $47 trillion
    • Value of signatories to PRI
      • $4.5 trillion signed up for PRI in first 18 months
    • First three principles of PRI:
      • Insofar as is consistent with fiduciary duties
        • Incorporate ESG issues into investment analysis and decision-making
        • Be active owners and incorporate ESG issues into our ownership policies and procedures
        • Seek appropriate disclosure of ESG issues by entities we invest in.
    continued 
  • 27. Principles of Responsible Investment (PRI)
    • Who has signed up so far?
      • Asset owners
      • Investment managers
      • Professional services providers
  • 28. Where do we go from here?
    • Ask your pension fund if it takes account of ESG and if not why not
    • If it does ask how it does and to see pension fund mandate given to asset managers
    • Issues remain:
      • Darfur
      • Sudan
      • Norweigan pension fund
      • Calpers and Calsters
      • Reluctance of US pension funds to accept ESG as lawful and material investment considerations
  • 29. Final Thoughts
  • 30. Final Thoughts
    • “ You can either sit with a hood over your head and pretend things won’t change or you can get ready for it.”
    • Jeff Immelt, CEO, GE.
    • “ Climate change and its impact on key industries is the greatest challenge facing us in the 21 st century.”
      • Just about anyone and everyone from Al Gore to Tony Blair to Sir David King, Chief Scientific Adviser to the UK Government and from Arnold Schwarzenegger , the Governor of California, to Gordon Brown and Margaret Beckett.
    continued 
  • 31. Final Thoughts
    • ESG not a substitute for existing valuation tools but an additional one
    • Opportunities as much as risks
    • Examples:
      • GE ecomagination
      • BP renewables investment
      • Emerging climate change insurance products and services
    • Forget Friedman and his Chicago acolytes. Their response was based on corporate America getting on board the Marrakech Express with Crosby, Stills and Nash
  • 32.
    • If my pension fund is wedded to profit maximisation how come my return on investment is so poor?
    • Do the right thing is consistent with fiduciary duties
    Final Thoughts
  • 33. LeBoeuf Lamb Worldwide Moscow Riyadh Johannesburg Almaty Beijing Paris Brussels London Albany Boston Hartford New York Washington, D.C. Jacksonville Houston San Francisco Los Angeles Pittsburgh Chicago
  • 34. QUESTIONS? The sustainability of fiduciary duties