Fiduciary Duty: What’s at stake in the ‘once in a lifetime’ UK legal review?

First in a series looking at an important review taking place in the UK

As the UK’s Law Commission consults on fiduciary duty, Responsible Investor launches a series of articles looking at some of the issues raised by this unique opportunity to review the concept.

Fears are emerging that a “once in a lifetime” review of the concept of fiduciary duty that grew out of the Kay Review in the UK will fail to bring about any legal clarity about taking long-term environmental, social and governance factors into account in investment decisions.

A review of fiduciary duty was one of the recommendations of the government-sponsored Kay Review into market short-termism. Campaign group ShareAction had paved the way during the consultation and before it with two major reports.

Proponents of a review of fiduciary duty argue it is often wrongly taken to mean that investment returns should be maximised regardless of any other factors.

The government accepted Kay’s recommendation and asked the Law Commission, the independent body which reviews the legal framework, to take a look at the issue. It had been feared the review could take up to five years. But the Commission pushed ahead and published its initial findings recently; the consultation runs until the end of January ahead of a final report that is expected in June.

So far, so good. But industry figures who gathered recently at a brainstorming session convened by UKSIF, the UK Sustainable Finance Association, heard the report contains misconceptions about climate change and trustee discretion. In its acceptance of modern portfolio theory it implicitly undermines another key finding of Kay; that’s to say his backing of concentrated portfolios.But the biggest problem, the event heard, is that it dismisses the need for explicit clarification of the law and doesn’t change the legal standing to any great degree. Importantly, there is no “clear succinct statement” on trustee discretion.

One senior investment figure lamented that, drafted by lawyers for lawyers, it lacks the human touch. This person called it reductionist and patronizing about trustees and beneficiaries.

And the report appears to stop short on another element – stewardship – arguing instead that it should be limited to large listed companies and big investors.

It’s feared that the Law Commission appears not to understand how assets are managed via investment mandates. Whether this is deliberate or not is open to question. Indeed, the Commission’s working definition of ESG is that it stands for ethical, social and governance – not the more usual ‘environmental’ definition.

There was also unease that a lengthy discussion of accounting rules in the report strayed too far from the Commission’s tight remit.

The point was made at the event that the Commission defines risk too narrowly, without reference to a timescale.

In addition, it shouldn’t be just about “returns”, but specifically risk-adjusted returns, that’s to say taking ESG risks and other externalities into account more fully. Also the inter-generational angle is not addressed.

Indeed, one leading figure suggested to RI that the report has been held back by the “forces of conservatism”.
Link to Law Commission report

Tomorrow: ShareAction argues that responsible investors need to look at where they can feed into the review.