Introduction

This chapter considers the evolving application of fiduciary duty to pension funds and how this affects funds’ investment exposures to sustainability generally and environment, social and governance (ESG) factors more specifically. We focus principally on European and US pension funds. Fiduciary duty in the UK has developed through common law origins to exert particular influences on pension fund practices. A similar background applies to US pension funds that have been particularly influenced by the ERISA legislation of 1974. The pension funds from continental Europe have a different legal context from the UK and the US but share many of the same principles. While unique national circumstances and legal contexts dictate certain pension fund differences, the concepts underlying fiduciary duty taken from the UK and the US have broad similarities in all countries where agents invest institutional funds on behalf of others.

The core issues of fiduciary duty are that those who manage investments on behalf of others are bound by a number of fiduciary obligations (Woods and Urwin 2010). There are four principal forms of this obligation:

• Loyalty: putting the interests of beneficiaries first when determining the investment strategy and avoiding conflicts of interest.

• Prudence: investing to the standard of a prudent expert.

• Diversification: diversify according to the principles of accepted investment theory.

• Impartiality: avoid favoring the interests of a particular beneficiary or class of beneficiaries over others.