3A.2 What about fiduciary duty?

Local authority pension funds often say that divestment on the basis of non-financial considerations is not possible because this would conflict with the fund’s fiduciary duty to act in the best interests its members. 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”.

There is a strong case that the interests of fund members will be best served by a fund which helps to limit the threat of nuclear war by divesting from the companies that produce nuclear weapons. 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”.

The two largest nuclear weapons investors, Lothian and Strathclyde pension funds, both maintain that fiduciary duty prevents them from divesting from companies for ethical reasons. However, Scottish Borders Council and Tayside pension funds have adopted broader definitions of fiduciary duty.

Scottish Borders’ statement of 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 Scottish Borders and Tayside have policies which restrict investment in certain harmful industries and there are examples in England too.

Principle 2.2.4 of Scottish Borders’ statement on responsible investment says: “When companies are involved in certain controversial activities, we may refrain from investment in those companies. For example, we may decide to exclude companies which are involved in the production of controversial weapons.” (For more in this policy see section 3.8.) While this falls short of a blanket exclusion, it does demonstrate that some form of restriction is possible.

Tayside Pension Fund’s ESG policy states that fund aims to disinvest from tobacco stocks (see section 3.3 for details).

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 soon followed by a similar commitment from Southwark Council. Southwark’s investment strategy states that “The Fund commits to transferring over time any current investments in these traditional energy sources in a way that is both structured and affordable and also meets the Fund’s fiduciary duties”.

Both Waltham Forest and Southwark are working to reinvest in “green” focussed assets.

These examples show that it is possible for Scottish local authority pension funds to pursue divestment from harmful industries.