Fiduciary Duty: Risk, Liability and Reward in a Changing Fiduciary Environment TUC Conference Paul Watchman 5 JUNE 2006

The question “is the integration of ESG into investment policy voluntarily permitted, legally required or hampered by law and regulation? Asset Management Working Group

Overview of study About Freshfields Bruckhaus Deringer The scope of our review pension funds mutual funds insurance reserves Teams involved

The Jurisdictions Australia France Canada Germany UK Italy US Japan Spain

Common law fiduciary duties Apply special knowledge + skill Act reasonably Consider suitability of investments Carry out the terms of the trust Common Law Duty to act for a proper purpose Duty to act prudently Consider relevant considerations Act in beneficiaries’ best interests Diversify Act with care skill + diligence Take proper advice

Civil law duties Civil Law Duty to act conscientiously in the beneficiaries’ interests Duty to seek profitability SPAIN “diligently” ITALY “professionally” FRANCE “prudently” No particular level of profitability is prescribed Civil Law Modern portfolio approach Other duties Either express or implied through a requirement for diversification In relation to liquidity and the types of assets that may be selected

Government endorsement of ESG considerations ESG disclosure requirements apply in - Australia Canada France Germany Italy pending Japan Spain UK US     

Y N Y N Y STEP ONE Formulate investment strategy Must have regard to the risk and return objectives of the fund The consideration must be taken into account together with all other relevant considerations Is the ESG consideration the subject of consensus? STEP TWO Gather information. What regard must / may be had to an identified ESG issue? Y N Is the ESG issue likely to affect financial performance? Y N The consideration may be taken into account together with all other relevant considerations Is the ESG issue a point of differentiation between investments? Y STEP THREE Weigh up the relevant considerations This is a decision for the decision-maker taking into account legal duties

Value -v- Values Integration of ESG considerations into investment decisions is mandatory Provided that Provided that The ESG consideration is reasonably expected to have a material impact on the financial performance of the investment The ESG consideration is reasonably believed to be the subject of consensus – express or implied - amongst the beneficiaries We believe that ESG considerations may also be used to differentiate between otherwise equally attractive investments

Conclusions A decision-maker must have regard to ESG considerations as relevant considerations The weight to be given to each relevant consideration is a matter for the decision-maker ESG considerations may also be integrated into investment decision-making where there is consensus or as a “tie-breaker”

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