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11 Funding Climate Change: How Pension Fund Fiduciary Duty Masks Trustee Inertia and Short-Termism
- University of Pennsylvania Press
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C h a p t e r 1 1 Funding Climate Change: How Pension Fund Fiduciary Duty Masks Trustee Inertia and Short-Termism Claire Woods Introduction On January 27, 2010, the U.S. Securities and Exchange Commission (SEC) voted to provide guidance on when public companies should disclose the impact of climate change-related business or legal developments. While the SEC’s guidance does not constitute a legal change, it underlines more powerfully than ever that climate change is a risk that investors cannot ignore. Institutional investors, with their broad exposure to systemic risk, should be particularly alert to the implications of this new development. Pension funds control, on average, assets equivalent to 76 percent of the GDP of their respective countries throughout the Western world.1 In 2006, U.S. pension funds held shares representing approximately one-quarter of U.S. equity markets;2 U.K. pension funds held shares representing approximately 13 percent of U.K. equity markets.3 As large shareholders, they have profound potential to influence companies in almost all industries. This chapter focuses on Anglo-American pension funds, because they are similar enough to make comparison straightforward.4 The advent of two global crises, the global financial crisis and climate change, demands an examination of the investment decisions of pension funds in the face of increasingly Funding Climate Change 243 complex risk. Are these financial behemoths fulfilling their potential to invest in a better future? Or are they acting myopically, concentrating on quarterly financial performance while funding business in ways that have contributed to and continue to fuel these crises? At the time of writing, climate change and the global financial crisis present significant challenges to governments around the world.5 These crises are, to an extent, linked by their genesis in short-termism: in both cases, governments and industry have fostered short-term financial gain without sufficient regard to longer-term social costs of the externalities at play.6 The Stern Review highlights the central importance of environmental sustainability to continued economic growth: The evidence shows that ignoring climate change will eventually damage economic growth. Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century. And it will be difficult or impossible to reverse these changes. Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries. The earlier effective action is taken, the less costly it will be.7 As for the financial crisis, pension funds have been hit hard. The total assets of all pension funds in the member countries of the Organisation for Economic Co-operation and Development (OECD) declined by US$ 3.3 trillion (that is, nearly 20 percent) from December 2007 to October 2008.8 If private pension assets are included that figure rises to US$ 5 trillion.9 From a broad ethical point of view, it is arguable that pension funds should have a wider ambit of responsibility for promoting a sustainable future, given their financial power and their incursion into service provision once the purview of the state.10 I argue here that fiduciaries’ personal ethical considerations should form a basis for individual investment decisions : the ethical viewpoints of individual trustees and asset managers are too subjective and idiosyncratic to form a proper basis for ad hoc investment decision making. On a wider scale, however, ethics can contribute to our ontological understanding of the role of pension funds. Benjamin Richardson argues that, given their financial significance, institutional investors have an obligation to use their power sustainably by investing in [44.223.31.148] Project MUSE (2024-03-28 13:32 GMT) 244 Claire Woods firms whose activities are sustainable.11 As Stern and others have argued, without environmental sustainability, the financial system ultimately cannot survive.12 The primary mandate of pension funds is the creation of financial returns for beneficiaries, but the extent to which this goal is achieved sustainably is a matter for trustees to decide. Pension funds have thus far shown some interest in advocating a change from the short-term focus of the financial system that has fueled the global financial crisis.13 However, the recent...