Are record energy profits creating an ethical quandary for trustees?

Simultaneously, the world’s five largest oil companies have shared quarterly profits of almost £50bn. As of 2021, UK pension schemes held investments of around £2,000 per person in fossil fuels.

With average expected energy bills set to exceed £5,000 from January according to some estimates, trustees are caught in the middle of maintaining fiduciary duties while responding to the ethical and financial crisis unfolding around them.

Trustees are not there to make moral or ethical judgments

Richard Butcher, Zedra

Taking action

Broadly, pension schemes are significant shareholders in a wide range of businesses around the world, including the largest companies on the S&P 500 and FTSE 100. As a result, many schemes may be exposed to oil and fossil fuel giants.

Maria Nazarova-Doyle, head of pension investments and responsible investments at Scottish Widows, says schemes must be aware of the implications of such holdings. 

“As an industry controlling nearly £3tn, we have a responsibility to make use of these powers, helping to drive companies to take more positive actions for both people and planet,” she says.

Enacting change is not straightforward, however, as the majority of schemes are invested in pooled funds and so are not the legal owners of their shares. Anna Copestake, partner at Arc Pensions Law, says that in this instance, the power “lies in the ability to engage with the manager”.

Ultimately, trustees could “fire the manager if it doesn’t vote in a way that the trustees agree with”, she added, although they might be a “small fish in a large pond”. 

But the strength of trustees’ voices risks becoming diminished along the investment chain, impeding their potential influence.

Meanwhile, regulatory pressure on the back of 2019’s Shareholder Rights Directive II is pressing trustees to demonstrate engagement with managers and how that may be influencing underlying companies.

“There is a suggestion that trustees set an expression of wish asking managers to vote in a certain way,” explains Copestake, who says that while managers will not have to follow it to the letter, it would allow trustees to monitor whether the manager’s policies are aligned with their own.

Practical issues around operational systems still impede many managers, but solutions are being explored, Copestake adds.

‘Not a crisis for trustees to manage’

In a potential case of a pension scheme voting against the payment of a large dividend, which would otherwise be payable to the scheme for the benefit of members, this must be “demonstrated to be in members’ best interests,” Philip Jelley, pensions partner at Gateley Legal, says.

He adds that voting down a large dividend payment would reduce the short-term investment gain by the scheme and may make an investment in such a company “less attractive” in the future to other investors if dividend payments were to be blocked. 

“This action itself could then potentially negatively affect the share price over the longer term, making both investment and legal advice essential,” he explains.

While trustees inherently hold significant responsibility over millions of savers’ money, the cost of living crisis “isn’t a crisis for trustees to have to manage”, according to Richard Butcher, managing director at Zedra, with trustees “obliged” to use excess profits for the benefit of scheme members.

He notes that a trustee’s primary aim is to invest assets for the financial benefit of their beneficiaries. “If the companies they are investing in happen to be making super profits, which we might think are amoral or not, it doesn’t really matter.”

“Trustees should be absolutely laser-focused on their fiduciary responsibilities,” he added. 

“ESG isn't an ethical or moral subject matter — it's all about identifying long-term financial risks consistent with our fiduciary responsibilities, and mitigating those long-term financial risks consistent with our fiduciary responsibilities. Trustees are not there to make moral or ethical judgments,” he adds.

Butcher also notes that in the past, the only time there’s been a dilution of ethos was when people became “confused” about what trustees' responsibilities are.

Member engagement is low

Trustees may not hold the same kind of engagement influence that other major shareholders enjoy, but members can voice their opinions, particularly on contentious issues such as record energy company profits during a cost of living crisis. 

But member engagement remains low across most schemes, Copestake says, owing to information for members being “difficult to understand and [may] not provide the best information to engage”.

Member engagement is not a direct avenue to action being taken, however. Simply because a member is engaged and wants the trustees to take action, it does not mean the trustees will or can.

“Trustee legal duties must be complied with and there remain important questions about the scope of what trustees can do beyond making decisions through a financial lens," Copestake adds.

As the cost of living crisis tightens, the profits made by energy and fossil fuel companies will remain controversial. For now, trustees’ fiduciary duties remain steadfast.

As Zedra’s Butcher puts it: “I want to make a moral judgement, but I have to do my fiduciary duties first.”