Tough new recommendations in the United Kingdom governing the types of industries fund managers and pension trusts invest in could be released by the end of the year.
It means consultants and advisors working for pension funds worth billions of dollars may have to consider the long-term environmental and social impacts of their assets.
The UK’s Law Commission, which reviews and suggests reforms to the law, is currently examining how the law of fiduciary duties applies to investment intermediaries.
Environmental news website RTCC reports the study is in response to the 2013 Kay Review into financial markets, which was critical of the ‘short-termism’ displayed by many investors.
It seeks to clarify how far investment consultants should take account of factors such as social, environmental and ethical impacts, and also who should bear fiduciary responsibility for asset management.
George Latham, Managing Partner at WHEB Asset Management said what was at stake is transparency and accountability.
“At the moment fiduciaries focus on short term financial returns. However, this may not be in the best interests of beneficiaries in the kinds of long term timescales that are needed,” he told RTCC.
“If you’re in a pension scheme and retiring in 30 years’ time, are the year by year narrowly defined financial returns the right focus?
“A pensioner’s wider interest is also in the kind of world into which they will retire.”
Abigail Herron, head of Responsible Investment Engagement at Aviva Investors agreed.
“It makes no sense that investment decisions are made in a vacuum,” she said.
“Current rules over who is responsible for investing are “opaque” she added.
“The lack of clarity with regard to who is subject to fiduciary duties and what they are is an underlying issue.”
Last month United Nations climate chief Christiana Figueres warned fund managers could be breaking the law if they continued to divert cash into oil, gas and coal companies.
She said: “Investment decisions need to reflect the clear scientific evidence, and fiduciary responsibility needs to grasp the intergenerational reality: namely that unchecked climate change has the potential to impact and eventually devastate the lives, livelihoods and savings of many, now and well into the future.”
RTCC reports a survey by analysts Towers Watson revealed US$14 trillion of assets were under management in the world’s largest 300 pension funds at the end of 2012.
How much of that is comprised of fossil fuel stocks is unclear, but a 2013 study by Oxford’s Smith School of Enterprise and Environment could offer a guide.
It estimated US$240-$600 billion of the US$12 trillion of assets in public pension funds and university endowments was invested in coal, oil and gas.
Smaller efforts to force Universities and other public bodies to ‘divest’ their fossil fuel holdings have gained high levels of publicity but not made a significant dent into oil major finances.
The Smith School study revealed campaigns by leading climate pressure groups like 350.org are making fossil free funds more common, but had little discernible short-term impact.
RTCC reports a recent trend from leading development banks to cut funding to fossil fuel power plants may have a more potent effect.
In the past year the European Investment Bank, European Bank for Reconstruction and Development have released plans to cut or curb backing for projects linked with high carbon emissions.
Last month World Bank chief Jim Yong Kim added his voice to those calling for tougher action to cut levels of greenhouse gas levels through divestment.
“Through policy reforms, we can divest and tax that which we don’t want, the carbon that threatens development gains over the last 20 years,” he told an audience at the annual World Economic Forum meeting in Davos.
Reports indicate a strong message from the UK Law Commission will have knock-on effects around the world.