(Re‐)Interpreting Fiduciary Duty to Justify Socially Responsible Investment for Pension Funds?

• Published date: 01 September 2013
• Date: 01 September 2013
• DOI: http://doi.org/10.1111/corg.12028
• Author: Joakim Sandberg

(Re-)Interpreting Fiduciary Duty to Justify

Socially Responsible Investment for

Pension Funds?

Joakim Sandberg*

ABSTRACT

Manuscript Type: Conceptual

Research Issue: A critical issue for the future growth of socially responsible investment (SRI) is to what extent institutional

investors such as pension funds can be persuaded to engage in it. This paper considers attempts at justifying such

engagement stemming from a range of (re-)interpretations of the f‌iduciary duties owed by pension funds to their benef‌i-

ciaries, and thereby develops a hypothesis concerning the most effective political or legal remedy.

Research Findings: Previous commentary suggests that f‌iduciary duty either already mandates SRI for pension funds, or

at least can be made to do so rather easily. In contrast with this, however, this paper f‌inds that none of the considered

interpretations is able to justify engagement on social and environmental issues across the board. Indeed, the problem to

some extent seems rooted in the very concept of f‌iduciary duty.

Theoretical Implications: The paper is relevant to current attempts at justifying SRI through reinterpretations of f‌iduciary

duty, provided mainly by legal scholars and practitioners. By addressing the more philosophical issue of how far the

concept of f‌iduciary duty can be “stretched” to accommodate SRI (a project of conceptual rather than legal clarif‌ication), it

provides an evaluation of the contemporary debate which is independent of squabbles about existing law.

Policy Implications: The papershows that there are conceptual limits to attempts at redef‌ining f‌iduciary duty. But this does

not mean that pension funds’ engagement in SRI is unjustif‌ied or unjustif‌iable more generally. A more promising way to

legally mandate SRI may be through what is dubbed independent social and environmental obligations.

Keywords: Corporate Governance, Institutional Shareholder, Legal Origins and Control, Ownership Mechanisms,

Pension Fund Ownership

INTRODUCTION

As (potential) owners of companies, investors have a

crucial role to play in the corporate governance setting

in order to incentivize or force companies to commit further

resources to corporate social responsibility. Most power

rests with large-scale institutional investors like pension

funds, which basically are enormous pools of money

invested in a wide array of shares and bonds on the stock

market. These funds have really become the dominant

players on the world’s f‌inancial markets over the last 50

years or so. According to a recent report from the OECD

(2008), the pension funds of Western countries hold assets

equivalent to (on average) 76 percent of the GDP of their

respective countries. If pension funds could be persuaded to

become so-called socially responsible investors, they would

obviously be an important force for corporate social respon-

sibility worldwide.

Socially responsible investment (SRI) can be def‌ined as

the practice of integrating putatively social, ethical, and/or

environmental considerations into one’s f‌inancial invest-

ment process. Whereas conventional or mainstream invest-

ment focuses solely upon f‌inancial risk and return, SRI also

includes social or environmental goalsor constraints in deci-

sions over whether to, for example, acquire, hold,or dispose

of a particular investment. This practice has received

increased attention over the last couple of decades – accord-

ing to recent estimates, the total amount of investments with

an explicit social or environmental prof‌ile is $3 trillion in

the US and €5 trillion in Europe (Eurosif, 2010; Social

*Address for correspondence: Joakim Sandberg, Department of Philosophy, Linguis-

tics and Theory of Science, University of Gothenburg, P.O. Box 200, SE-405 30 Goth-

enburg, Sweden. E-mail: joakim.sandberg@f‌ilosof‌i.gu.se

436

Corporate Governance: An International Review, 2013, 21(5): 436–446

© 2013 John Wiley & Sons Ltd

doi:10.1111/corg.12028