Local authority pension funds are subject to a “fiduciary duty” (legal obligation) to act in the best interests of fund members. Representatives of the funds often say that this precludes them from divesting from harmful industries.
This argument is based on a narrow construction of fiduciary duty that is limited to financial return on investments. Fund managers cannot take into account non-financial considerations in their investment decisions, it is claimed, because this would conflict with their fiduciary duty.
However, a legal opinion on fiduciary duty commissioned by the Scottish local government pension scheme’s advisory board makes it clear that funds can take into account non-financial factors in their investment decisions, “so long as that does not risk material financial detriment to the Fund”. Two Scottish funds appear to have done so already (see below). Moreover, the letter from the advisory board that accompanied the opinion emphasised the importance of guarding “against extremes or selective interpretation of the legal principles by Pension Committees and Pension Boards, for instance which might unduly restrict the consideration of ESG and other wider factors”.
Examples of funds that restrict investment in harmful industries
Scotland’s two largest local authority nuclear weapons investors, Lothian and Strathclyde pension funds, both maintain that divesting from companies for ethical reasons would conflict with their fiduciary duty. However, Scottish Borders Council and Tayside pension funds have adopted interpretations of fiduciary duty that are more in line with the advice of the Scottish local government pension scheme’s advisory board (see above).
Scottish Borders’ statement on responsible investment says:
“Fiduciary duty goes beyond simply enhancing long term returns, and in order to act prudently in the best interest of the scheme members, trustees should consider the impact of their investment decisions on risks such as climate change and other ESG related issues that can have an impact on sustainability and the value of the assets of the Fund over the long term.”
Tayside Pension fund’s policy on Environmental, Social and Corporate Governance uses language from the advisory board’s letter (cited above), stating that the fund should “exercise their fiduciary duty to guard against extremes or selective interpretation of the legal principles which might unduly restrict the consideration of ESG and other wider factors”.
Both Tayside and Scottish Borders have policies which restrict investment in certain harmful industries (see sections 3.3 and 3.8) and there are examples of councils pursuing divestment strategies in England. In 2016, Waltham Forest became the first local authority to announce that it would divest its £735 million pension fund from fossil fuels. This was followed by a similar commitment from Southwark Council.
Accepting that divestment is possible
Scottish local authority pension funds are under growing pressure to accept that fiduciary duty does not preclude divestment from harmful industries. In April 2021, Glasgow City Council passed a resolution calling on Strathclyde Pension Fund to completely divest from fossil fuel companies as quickly as possible. The resolution recognises the role of fossil fuel industries in “driving the climate and ecological emergencies and perpetuating global inequalities” and notes that “many other major public and private institutions have already made and acted on commitments to fossil fuel divestment, demonstrating leadership on the climate emergency at the same time as protecting the long-term interests of their individual investors”.
The resolution came a few months after publication of the council’s Climate Emergency Implementation Plan, which proposed that the council “work with pension investment funds in the city to encourage the development of divestment strategies from the fossil fuel sector”. The plan states that pension funds should consider not only “how the future is likely to impact on their ability to meet long-term liabilities” but also “their members’ ability to live in a world that is worth living in” – an implicit reference to fiduciary duty.
Divesting from nuclear weapons producers
We contend that divestment from the nuclear weapons industry is not only possible under fiduciary duty but would, in fact, be fully in line with that duty.
Divestment would ensure that fund members’ pensions would not be exposed to the financial risks of investing in companies that make banned weapons (see section 1.3). Divestment would also help to mitigate the risk of a nuclear war that would have devastating consequences for fund members, and for everyone else (see section 1.1).
Surely this would be in the best interests of pension fund members?
 http://lgpsab.scot/wp-content/uploads/2016/06/Letter-to-Funds-on-Fiduciary-Duty.pdf. It is also useful to note that in 2020 the Palestine Solidarity Campaign successfully challenged the legality of UK government guidance that restricted the ability of English local authority pension funds to pursue “divestment and sanctions against foreign nations and UK defence industries … other than where formal legal sanctions, embargoes and restrictions have been put in place by the government”: https://theferret.scot/palestinian-boycott-divest-sanctions-pension-divest/.
 Text of resolution: https://www.glasgow.gov.uk/councillorsandcommittees/agenda.asp?meetingid=17375. Report by Friends of the Earth Scotland: https://foe.scot/press-release/climate-activists-celebrate-glasgow-city-council-support-for-campaign-to-end-500-million-fossil-fuel-investment/.