Fiduciary duty vs climate action: the battle over pension fund investments

Welcome back to Sustainable Views, the podcast looking at sustainability policy and regulation in depth. My name is Philippa Nuttall and I'm editor of Sustainable Views. So today we're going to be talking about pensions, not the sexiest topic perhaps, and while the subject may seem rather removed from today's news led by the conflict in the Middle East, obviously any kind of investment can be hit by global turbulence and our pensions may of course even be funding the war as funds look to invest where the returns are highest. Where pensions are invested and trying to get funds to take more notice of climate change and other long-term risks has for many years been the focus of various campaigns. In the UK, for example, there was the Make Money Matter campaign co-founded by Richard Curtis, the screenwriter and director famous for those 1990s UK films such as Four Weddings and a Funeral and Love Actually, though this campaign has now stopped. But one of the blockers to more pressure on pension funds to invest in the good stuff has been what we call fiduciary duty, which forces a focus on risks and returns and green financing has not been seen as leading in terms of returns. But at the moment, this subject is back in the news, especially in the UK, as Flo is going to explain to us shortly. But Lizzie, to kick us off, you've been following this subject for quite a while. Can you explain kind of what changes we've seen in recent years around fiduciary duty and any trends that have sort of played out in the last couple of years?

Yeah, so I mean, the big kind of theme of the last couple of years that is difficult to get away from is the kind of intense politicisation of fiduciary duty in the US. But kind of long before that all kicked off, the UK has been playing an outsized role in this on the kind of legal side. So there's been a lot of debate in the UK going back about 15 years, possibly longer. There's been various kind of law commission reviews, a lot of legal opinions commissioned, and possibly the most significant was by the Financial Markets Law Committee, which was in 2024. So those legal opinions and all that guidance have largely landed on the view that yes, absolutely, climate risk is part of a trustee's fiduciary duty. So many trustees do want to see it explicitly expressed in trust law, but others say it's not necessary and could actually be counterintuitive, pushing trustees towards box ticking and away from independent judgment. And when I spoke to the authors of the Financial Markets Law committee back in 2024, they insisted that the fact the rules are principles-based at the moment is intentional.

Yeah, interesting, this idea constantly about trying to get away from box ticking, which has definitely become a theme as well recently. And so Flo, last week there was a shift in the UK with pensions minister Torsten Bell saying the country should leverage pension capital to deliver on its sustainability targets. Can you explain exactly what he said and what this could mean for pensions and climate action? And how this fits with current fiduciary duty rules?

Yeah, absolutely. So, um, UK Pensions Minister Torsten Bell was speaking at the UK Sustainable Investment and Finance Association's Ownership Day on March 3rd, um, and he was kind of just summarizing what the government's been doing on pensions and seeking to offer some clarity to the room, which was full of kind of investors including pension funds, um, This government has done a fair bit on pensions. Their main kind of thrust has been this concept of consolidation, which they're trying to bring through the Pension Schemes Bill. And we also saw in May last year, 2025, the Mansion House Accord, which was when 17 pension funds agreed to invest at least 10% of their workplace portfolios in assets that boost the UK economy. So that's things like infrastructure. So yeah, the idea behind this consolidation is that instead of having lots of little pension funds, they're kind of grouped together into so-called mega funds. And there's a specific kind of requirement in the Pension Schemes Bill that defined contribution funds go into mega funds that start from about £25 billion. The theory with this is that bigger funds can invest in kind of bigger assets, so things like infrastructure. Speaking at the UK SIF Ownership Day, Minister Bell was very keen to link this to sustainability. Of course, it was a sustainable-focused audience, and he was kind of saying that the sustainable transition is essentially an investment project. And if you want things like clean energy, if you want things like flood resilience, anything that requires this kind of big infrastructure spend, then you need bigger pools of investment. But it is worth noting that there's not any kind of inherent aspect of consolidation that makes it more sustainable. It's more kind of just this idea of grouping funds and then how that investment is allocated can or cannot be sustainable depending.

So basically these are some good words, but not necessarily— it won't actually translate into any kind of change on the ground unless this is potentially consolidated in law, codified in law, as Lizzie was saying.

Yeah, I think it's a bit of a mixed picture and it's hard to see at the moment exactly what it's going to look like. The pension scheme bill is meant to be being signed into law in the UK in the early part of this year. So that should be coming, you know, any, any time. I think in principle a lot of pension funds are kind of up for the idea of consolidation. And often this idea is banded around that, that kind of you have Canadian or Australian pension funds that are investing in UK bridges or whatever kind of infrastructure. And I think this idea in principle that UK pension funds should be investing in UK infrastructure is not especially controversial, but I think it kind of links back to what Lizzie was saying, that, you know, there's all kinds of discussions into the nitty-gritty about what pension funds should and shouldn't be required to do in law. And I think a lot of pension funds are largely just looking for some clarity around fiduciary duty and consolidation and what it will actually mean for them in practice. To go back to Minister Bell, he has kind of joked that, you know, we're going to see an end to this endless consultation and kind of moving from one niche consultation to the next, but in the UK, that seems to be how we do things. So yeah, we'll see, we'll see what happens there.

And so has the main reaction to be to, uh, Minister Bell's, uh, comments, um, and what's happening in the UK been a, a call for clarity, or has there been actually any sort of specific reaction from any of the bigger pension funds?

I think the call for clarity is the main thing. Um, there's been some kind of reaction around, um, more kind of sustainable-focused funds saying that this could be really good for things like nature-based investing. We've seen a growing interest in nature-based investing from pension funds. As you mentioned at the top of the episode, they're kind of longer-term investors. And therefore looking at things like regenerative agriculture and soil health are something that they're very much able to invest in, in theory, because it's kind of looking at this longer-term risk and long-term productivity of land and soil. And we've seen that as a growing area of interest for pension funds that, I mean, being frank, they're not doing this as kind of like a wide-scale strategy. Like, still a significant part of their investments will be going into things which are degrading nature rather than improving it. But I think there's definitely been interest in that area. And there's been some link between that and fiduciary duty as well, because it's explicitly kind of a risk-based investment. You're investing in something to secure the future productivity of the agriculture sector. So I think that's something I'll be keeping an eye on as well.

Super.

And Lizzie, so we've heard about the UK there, and you mentioned the US in your opening remarks. I was wondering sort of if you could elaborate a bit more in terms of what's happening in the US, but also in the EU, what we've seen around sort of pensions and climate change and the need for any change.

Yeah, so I'm going to go with the EU first because it's a bit simpler. And so just because of the way— for now— and just because of the way the EU operates, much more based on regulation than kind of historic trust law. It's a bit clearer for EU-headquartered pension funds, so the debate is a bit more about kind of the extent to which climate should be incorporated into those pension regulations, as opposed to endless debate about whether it should or should not be part of it. That part is relatively clear. Obviously, as I said at the beginning, in the US it's very different and there's a really big gap as you'd expect, along political lines. So we've seen an awful lot of action at state level from both red and blue states, kind of depending what side you're on. A lot of Republican states have introduced these anti-ESG rules. Earlier in February, there was actually a key ruling about one of these laws, the Texas's anti-ESG rule, which had said that Texan pension state pension funds were not able to invest with asset managers that considered climate part of their fiduciary duty, and that has been now ruled unconstitutional. And I've written about that recently. And so there is a question mark over the kind of the future of all of those laws in different states. But it's not just at a state level. And so at the federal level, the pendulum just swings back and forth depending on who is the president. Since Obama was in office, the ERISA Department of Labor rule, which essentially guides pension fund trustees on their fiduciary duty, whether ESG factors are a part of it or not, has swung back and forth depending on who wins the election. And so at the moment, ESG factors are not part of a pension fund trustee's considerations. But you know, you can imagine that that will just continue to happen. And then the other big theme that we are seeing everywhere, but obviously the US loves a bit of litigation, so it's particularly pronounced there, is lawsuits against pension funds. And these can again come from either side of the political spectrum. But last week, I believe it was, ClientEarth, the environmental charity, and they announced that they were suing the US real estate group Cushman Wakefield over pensions. So they were kind of assisting a policyholder in a workplace pension for not considering climate risks adequately. And there's also quite a big suit against Canada's biggest pension fund at the moment as well. So that is picking up steam.

And sort of cases in terms of litigation, I mean, this is obviously quite new, but I mean, is there any real sort hope that they're going to be able to win in any case, in the sense that none of this, as you say, is really sort of codified into law, and there still is this emphasis on risks and returns overall and to take everything into consideration, obviously not just climate change?

Yeah, I think it's difficult, and it's very— it's similar to the way, you know, climate litigation on the whole, where once you get one ruling in the plaintiff's favor, then, you know, do all the dominoes fall after that. And so I think judges are very aware of that huge kind of responsibility and influence that they could have. And so again, maybe it's for political reasons, you know, tending to rule cautiously. Even being sued, even unsuccessfully, it's not pleasant. And we hear this all the time. And so they can be very effective in kind of forcing change, even if you don't win. In the court. And so yes, the hope is that they would be effective there, but, you know, pension funds face litigation risks on both sides because overly considering those climate risks could also expose you to, you know, not adequately considering financial risks in other ways.

And you've covered this, as we've said, for quite a number of years now. Do you see that there is any sort of form of real change here in terms of pensions. I mean, Flo's mentioned what's happening in the UK. Even this idea of investment in infrastructure is sort of tangentially almost climate-related in the sense that if you're using money from a pension fund to shore up a bridge or a road or something, that work would still need to be done. And obviously we can say it's climate adaptation funds, but it's this kind of fine line between is it just general infrastructure or is it really sort of climate? So yeah, do you see that we're actually going to be moved to, I suppose, a more intentional focus on climate, or do you think that's kind of quite a way down the road in terms of even in the UK where things may go? And I suppose especially at the moment, given that across the board in the Western Hemisphere at least, we're seeing this sort of pushback against green regulation more generally into more pushback against interference from regulation in what businesses or finances are allowed to, the financial sector is allowed to do. Yeah. How do you see this sort of playing out perhaps in the medium term and then in the slightly longer term?

Yeah. So to your first point, there was actually the nonprofit Sierra Club recently called out CalPERS, which is definitely California's biggest pension fund. It might be, it's among the biggest pension funds in the world. And so they have a $100 billion sustainable finance mandate. And Sierra Club recently kind of criticized the way they categorize those investments, you know, said that it's a very broad brush of what they consider sustainable. And there have also been questions in the US on exactly that point that Flo was talking about, which is, you know, is it really that helpful for the broader system if pension funds are investing in assets thousands of miles away when, you know, there are clear infrastructure or other needs within the state, within the local county? And so there is that discussion ongoing. In the longer term, or stepping back a bit, I think the position where pension funds are at right now is, if they were isolated from the broader system, I think that they are very much aware of this. They are very long-term asset holders, and so they do— they don't get anything out of being political and swinging with those political winds. But the problem is that they exist in this broader system and they actually exist quite far removed from the companies that they invest in. There are various intermediaries in between them. And so their influence, while they are the ultimate kind of asset owners, their influence is quite limited and quite kind of fragmented. And so if companies are halting decarbonization plans or slowing down, or governments are making that harder by not introducing the policies that companies say they need, then that influence is even more limited. And, you know, that carries over to your opening thoughts about kind of defense and war as well. You know, if that's where the direction the economy is going in and that is where the growth is in, then there's that risk of kind of the other side of mitigation that they're also exposed to. But these are all kind of things that we are continuing to speak to pension funds, speak to asset managers, others about.

Yeah, it's certainly not a discussion that's, that's going to go away. And, and Flo, in the, in the UK, do you see any sort of longer-term trends and where you, where you think this discussion is, is going to land?

Yeah, I think in terms of the longer term, or at least for the duration of this government, I think this government is going to continue to focus on pensions. I think this whole kind of theory of change of the current government is that, you know, investment is necessary to drive growth, and growth is what the number one mission of this government. So I think in terms of trying to push UK pension funds to invest in UK assets which support growth, I don't see that changing anytime soon. Um, the extent to which these assets will be truly sustainable, I think, will depend. You know, we've had a lot of mixed messaging from this government around sustainability more generally. Things like really pushing for clean energy but simultaneously pushing for airport expansion. It's been a bit of a mixed picture, and I expect that the role of pensions in that is going to be the same, to be honest. I know that there's a lot of kind of good words linking consolidation to sustainability. And yes, in theory, it means you can invest in in clean energy assets, but it also means you can invest in loads of other things. So yeah, I think the emphasis will continue on consolidation and sustainability will be there, but whether it will be a central force, I'm not sure.

Yeah, interesting. Thanks to both of you. And definitely, yes, something that we will keep covering and stories, various stories that we've got in the pipeline at the moment. And Flo, it was interesting that you mentioned nature as well because The next podcast will be an interview where you're speaking to Craig Bennett, the head of the Wildlife Trusts, about investment in nature-based solutions in the UK. So that's a nice link between the two to see exactly where UK investments are going and how it all fits together in terms of the primary financial sort of system and the challenges of climate and nature loss across the UK. So thanks to both of you for speaking today, especially you, Flo, because you were a little bit ill this morning. And so, yeah, great to have you on. And we'll keep speaking about this subject. And if you want to listen to more podcasts from Sustainable Views or to read our journalism, go to our website at sustainableviews.com.