A new Take on Fiduciary Duty

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    Stockholm (NordSIP) – In the context of the publication of the High-Level Expert Group (HLEG) on Sustainable Finance’s final report, Magnus Billing, CEO at Swedish Pension Fund Alecta and one of the HLEG experts, shared his thoughts during a conference in Stockholm. The group received a mandate from the European Commission to provide specific recommendations to help develop an overarching and comprehensive EU roadmap on sustainable finance. After a first interim report, published last July, the final report published today, 31 January 2018, contains eight concrete recommendations.

    For Billing, the most exciting point is the recommendation to change investors’ perspective on fiduciary duty, which is inherent to the second of the report’s eight recommendations: “Clarify investor duties to better embrace long-term horizon and sustainability preferences”. The scope of fiduciary duty, he explains, is often debated. Some believe that fiduciary duty should be limited to providing the highest possible return to clients, for a given mandate. But others think that integrating ESG criteria in the investment process should be an integral part of that duty, given the risks associated with those criteria. The HLEG report’s recommendation clearly states that the investors’ investment horizons should be re-aligned with those of their clients and beneficiaries.

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    Quoting the report: “The aim should be to make clear that in fulfilling their duties, investors should incorporate sustainability factors consistent with the broad interests, investment horizons and sustainability preferences of their clients and beneficiaries. It should also be clarified that stewardship of investments is a fundamental element of fulfilling these duties.” If the relevant European guidelines and regulations integrate this concept, it could represent a significant step in the direction of making capital decisions more focused on the long-term, thereby forcing the financial sector to make more responsible choices.

    Another interesting aspect that Billing pointed out is that incentives for the financial industry to make more sustainable investments were extensively discussed but rejected. According to Billing, financial incentives would distract the industry from the notion that ESG factors represent real investment risks that need to be imperatively taken into account in the investment process. Also, incentives can generate behaviours that capture these additional sources of income, without actually resulting in actual benefits to society.

    The most challenging aspect of the recommendations, for Billing, will be the availability and quality of data and measurements, an issue that could potentially affect the HLEG report’s recommendation overall. At the moment, the processes of generating, collecting and analysing data in the area of sustainable and responsible investing are only in their infancy. There needs to be a feedback loop to test the processes and review the quality and reliability of that data.

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.
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