Fiduciary Duty: Risk, Liability and Reward in a Changing Fiduciary Environment TUC Conference

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Fiduciary Duty Risk, Liability and Reward in a
Changing Fiduciary EnvironmentTUC Conference

• Paul Watchman
• 5 JUNE 2006

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The question
is the integration of ESG into investment policy
voluntarily permitted, legally required or
hampered by law and regulation?
Asset Management Working Group
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Overview of study

• About Freshfields Bruckhaus Deringer
• The scope of our review

mutual funds
insurance reserves
pension funds

• Teams involved

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The Jurisdictions
France
Australia
Germany
Canada
Italy
UK
US
Japan
Spain
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Common law fiduciary duties
Apply special knowledge skill
Act reasonably
Consider suitability of investments
Carry out the terms of the trust
Common Law
Duty to act for a proper purpose
Duty to act prudently
Consider relevant considerations
Act in beneficiaries best interests
Diversify
Act with care skill diligence
Take proper advice
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Civil law duties
Duty to act conscientiously in the beneficiaries
interests
Duty to seek profitability
SPAIN diligently ITALY professionally FRANCE
prudently
No particular level of profitability is
prescribed
Civil Law
Other duties
Modern portfolio approach
Either express or implied through a requirement
for diversification
In relation to liquidity and the types of
assets that may be selected
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Government endorsement of ESG considerations
ESG disclosure requirements apply in -
?
?
?
?
?
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STEP ONEFormulate investment strategy
Must have regard to the risk and return
objectives of the fund
The consideration must be taken into account
together with all other relevant considerations
Is the ESG consideration the subject of consensus?
Y
STEP TWOGather information. What regard must /
may be had to an identified ESG issue?
N
Is the ESG issue likely to affect financial
performance?
Y
N
The consideration may be taken into account
together with all other relevant considerations
Is the ESG issue a point of differentiation
between investments?
Y
STEP THREEWeigh up the relevant considerations
This is a decision for the decision-maker taking
into account legal duties
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Value -v- Values
Integration of ESG considerations into investment
decisions is mandatory
Provided that
Provided that
The ESG consideration is reasonably expected to
have a material impact on the financial
performance of the investment

• The ESG consideration is reasonably believed to
  be the subject of consensus express or implied
  - amongst the beneficiaries

We believe that ESG considerations may also be
used to differentiate between otherwise equally
attractive investments
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Conclusions
A decision-maker must have regard to ESG
considerations as relevant considerations The
weight to be given to each relevant consideration
is a matter for the decision-maker
ESG considerations may also be integrated into
investment decision-making where there is
consensus or as a tie-breaker
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Fiduciary Duty The Risk, Liability and Reward in
a Changing Fiduciary EnvironmentTUC Conference

• End of presentationLC1481994