There is momentum behind the recognition of financial risks and opportunities associated with climate change and environmental, social and governance (ESG) factors in over the horizon investment decisions. This is driven not only by ethical shareholder groups but increasingly on the international scene by leading institutions who are proactively engaging with the associated valuation, risk management and disclosure issues. These changes shape debate around the investment of client funds in Australia (where there is no member-direction) and could be the tipping point that mainstream trustees and portfolio managers would be ill-advised to ignore.
A recent case filing in the United States (Arch Coal case) illustrates the importance of fund trustees and their directors remaining informed, proactive and engaged on the issues such as ESG that may materially impact on portfolio risk management and strategy. This has implications under Australian law.
A recent case filing in the US illustrates the importance of fund trustees and their directors remaining informed, proactive and engaged on the issues that may materially impact on portfolio risk management and strategy.
Arch Coal case in the United States
A breach of duty claim was recently made in the United States against the trustees of Arch Coal’s company pension plan – for continuing to invest in the sponsoring company’s stock. This case demonstrates the legal exposure of trustees who fail to proactively engage with the evolving risk/return landscape and sound an ominous warning of beneficiaries’ preparedness to litigate on point.
The plaintiffs are seeking compensation for a drop in the value of pension funds invested in company stock, which is alleged to have plummeted in value by 96% over the three and a half-year claim period, saying ‘an adequate (or even cursory) investigation by the Defendants would have revealed to a reasonable fiduciary that investment by the Plan in Arch Stock during the Relevant Period was clearly imprudent’.
Implications under Australian law
In Australia, the duties of pension fund trustees and their directors are not dissimilar to the United States.
The Arch Coal claim provides a stark illustration of the application of fiduciary laws in a dynamic modern economy. In particular, trustees who fail to consider the material financial risks (irrespective of whether they arise out of ‘financial’ factors such as market or economic change or ‘non-financial’ factors such as political or societal factors, or other environmental, social and governance (ESG) drivers) may open themselves to claims of failure to act in the fund’s best interests, and a failure to govern with the requisite care, skill and diligence.
The complaint illustrates that:
- It is no longer safe for fiduciaries to make an unreflective assumption that ESG issues are inherently ‘non-financial’. Nor can they allow personal convictions or extraneous interests to drive their governance decisions, rather than dispassionate judgment based on robust information and assessment.
- The duty of prudence (or, in Australia, the equivalent duty of due care and diligence) is not primarily concerned with performance outcomes, but the robustness of the reasoning processes on which they sit.
This is a short extract from an analysis of this case and its international implications published by Minter Ellison. Please contact authors Sarah Barker on +61 3 8608 2928 or Maged Girgis on +61 2 9921 4410 for a full copy.