Fiduciary Duties of European Institutional Investors: Legal Analysis and Policy Recommendations
15 Pages Posted: 23 May 2016 Last revised: 7 Jul 2016
Date Written: May 23, 2016
Pension funds play a linchpin role in Western, capitalist economies by allowing citizens to save for their future, and are generally viewed as fundamental to the stability and long-term orientation of the production system as a whole. It is essential to ensure that there is clarity as to society’s expectations of them. In theory, they have the correct incentives to engage with investee companies to steer them towards the long-term. Yet evidence suggests this is not happening despite escalating soft law interventions.
Environmental, social and governance (ESG) risks are increasingly seen as financially material, both in positive terms and in negative or defensive terms. Although trustees across the EU are legally permitted to take account of ESG factors in making investment decisions, the law in this area is vague and ill-defined. Furthermore, it appears that many investors are reluctant to factor these risks into their analysis, preferring instead to take a short-term, purely quantitative approach to management of risks across their portfolio.
Many investors want to take account of ESG risks in their policies and decision-making but are currently being held back by legal uncertainties and (ill-founded) fear of liability. This paper calls for clarification at EU (and national) level of the extent extent of the discretion available to pension fund trustees so as to enable them to play the role that is expected of them by their beneficiaries and society.
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