Funding Climate Change: how pension fund fiduciary duty masks trustee inertia and short-termism.

This paper sets out to demonstrate the potential of pension funds to drive corporate responses to climate change. It examines first why fiduciary duty is perceived as a barrier to change in investment practices, arguing that in theory fiduciary duty should not be perceived as a legal barrier to inclusion of climate change in investment strategies: fiduciary duty has evolved with social expectations in the past (and should be able to adapt to the increasing importance, financial and otherwise, of climate change now). However, in practice, courts, commentators and trustees have interpreted prudent investment as conventional investment. Thus prudence becomes the maintenance of the status quo. Legislative clarification is needed if pension funds are to change their approach toward climate change. Second, this paper argues that the focus on fiduciary duty as a barrier masks the role of trustee behavioural biases toward inertia and short-termism. When combined with the uncertainty surrounding fiduciary duty, these result in a collective action problem: pension funds are unlikely to break with convention absent industry-wide change. Under these conditions, any institutional acceptance of innovation toward a longer term, more sustainable investment strategy that accounts for climate change will take strong leadership from pension funds themselves