The global discussion of the role of the fiduciary in investment strategy is unfolding at an unprecedented pace.
In 2005, the pension community was presented with the Freshfields Report, which concluded that incorporating ESG considerations in investment decision-making to better manage risk and generate sustainable long-term returns was permissible — and arguably mandatory.
By December 2016, a UN document entitled Fiduciary Duty 21 proclaimed that ESG integration in the investment decision-making process was mandatory. However, the focus of the discussion was on the relationship between ESG and risk management and predicting financial performance.
The current discussion is now suggesting that the fiduciary's role is to go beyond financial considerations and invest for ESG impact, with particular emphasis on the 16 UNDP Sustainable Development Goals.
The idea of forsaking financial return in favour of ESG outcomes represents a marked departure from the ESG discussion that has occurred since the Freshfields Report.
PRI is now suggesting in its 2018 Asset Owner Strategy Guide that fiduciary duty extends beyond strictly financial benefits for stakeholders, and that real-world impact supporting the achievement of the sustainable development goals is an emerging view "that extends the traditional two-dimensional view of risk versus return (which should already include all material ESG factors, based on current interpretations of fiduciary duty), with a third dimension that charts the real-world impact that investments can have, on the natural environment and/or society."
While the discussion is exciting and timely from many perspectives, pension plan trustees should consider these developments with caution — particularly in British Columbia, where the pension standards legislation requires investment decisions to be made in the best financial interest of the beneficiaries.
Moreover, to date I am unaware of any judicial recognition of the appropriateness of integrating ESG into investment decision-making, let alone giving up return expectations for the sake of real-world impact.
Nonetheless, there are signs that institutional investors are in fact investing for real-world impact. A recent survey for ING and NN Investment Partners indicates that almost three quarters of Dutch investors are prepared to miss out on part of potential investment returns in order to support environmental, social and corporate governance considerations. La Caisse de dépôt et placement du Québec has entered a private equity investment partnership with Generation Investment Management LLP, with an initial $3 billion to create sustainable value in the form of successful long-term businesses.
As this trend continues, I am of the view that it will be important to track the outcomes of this form of impact investing on a mid- to long-term basis, in order to determine if the long-term best financial interests of plan members are being met despite forgoing returns on a short-term basis. Just as ESG was linked back to the pursuit of risk-adjusted returns, I believe it will be necessary to do likewise with investing for real-world impact in order to justify pension trustees adopting this investment strategy.