Legal and Institutional Reflections

The thesis has searched for ways in which the law can help to extend the timeframe for environmental decision-making. A number of related legal and institutional reflections can be expressed. First, the principle of intergenerational equity is a hopeful addition to environmental law, because it presents a mechanism by which judges balance the interests of current and future generations, especially with respect to the environment. Quite apart from imbedding a longer term timeframe within the patchwork of environmental law capabilities, the development of the principle by judges appears to be shaping the way that non-judicial decision-makers are required to think about environmental issues.

Chapter V’s review of relevant case law indicates that the principle of intergenerational equity is beginning to affect the ways in which administrative decision-makers approach environmental problems. First, the principle of intergenerational equity has been interpreted as requiring administrative decisionmakers to think about the cumulative environmental impact of proposed development projects. This is significant from a broader institutional perspective, because it represents an acknowledgment of the dangers of creeping environmental damage, those situations that arise in which courts ignore small environmental infringements without considering their cumulative impact.

Second, the case law suggests that courts are prepared to take a much more demanding approach to environmental impact assessments than previously. The Gray case paints this in stark relief: that case required an environmental impact assessment for a proposed coalmine development to include not only projected greenhouse gas emissions attributable to the construction of the mine, but also those greenhouse gas emissions expected to arise from the end use of the coal to be mined at the site. In these ways, the principle of intergenerational equity appears to have the scope to expand not only the way judges, but also administrative decision-makers, think about environmental problems.

Closely tied to the principle of intergenerational equity is the institution of the trust. The trust is a common law institution that since its creation in the Middle Ages has served as means for intergenerational wealth transfer. The trust therefore provides not only a theoretical lens for this thesis, but also an institutional basis for its conclusions. The trust was once primarily used for managing wealth within families; it now serves as the legal structure for pension funds, many of which have thousands of beneficiaries of different ages, worldviews and risk appetites. Reflecting upon the findings made throughout the thesis, it seems fair to conclude that the trust as an institution deals with these increased complexities imperfectly.

Trustees struggle to manage situations in which the interests of different beneficiaries within a fund conflict. As this thesis has shown, given the many different retirement horizons of pension fund beneficiaries, the ideal timeframe over which their wealth should be managed varies even within a single fund. This should have significant implications for investment strategy, but trustees of pension funds tend to revert to short-term strategies that are verifiable on a quarterly basis. Within the theoretical legal structure of the Planetary Trust, trustees are faced with deeply challenging questions of intertemporal choice. In effect, Planetary Trustees are required to put aside their own interests as current users of the planet’s resources in order to give effect to the interests of future generations. It is a profoundly problematic position.

Moreover, while the trust has a demonstrated ability to manage wealth effectively (though as the recent financial crisis has shown, some trust funds are better managed than others), the institution’s implications for environmental outcomes are less clear. In reality, trusts become a microcosm of the investment world: where financial implications of an environmental issue cannot be established, then for many investors it becomes irrelevant. Chapters III and IV argue that the context of climate change should catalyse a change in the approach that institutional investors take to environmental and social issues, making them a routine consideration within pension fund governance. However, trust law is a conservative beast.

It is conscience-based (and probably more flexible than most areas of law), but although it adapts to social change, it does so slowly. It tends to follow, rather than to shape, social norms. Thus although this thesis is optimistic about the ability of trust law (and fiduciary duty in particular) to make the institutional changes within the institutional investment industry that climate change might require, including encouraging pension funds to adopt a more nuanced way of formulating investment strategies and implementing governance principles, it nonetheless regards this process as incremental. Indeed, as the above section notes, legislative changes may be needed in order to speed the process along. How these imperfections within the trust’s operation might be addressed creates a series of questions for further research.

Governance Structures

Two main conclusions with respect to governance structures are drawn in this thesis. The first, raised in Chapter III and addressed in Chapter IV, is a recommendation that pension funds wishing to invest in a more sustainable manner (by having appropriate regard to environmental, social and governance considerations, and by extending the timeframe over which their investment strategies operate) do so within the structure of a purpose-built governance framework. This framework builds upon the pension fund governance work done by Clark and Urwin, and systematically addresses the changes to investment missions, investment beliefs, and investment strategies that should be made in order to achieve different degrees of commitment to sustainable investing. This framework offers pension funds a structure that will help them not only to attain a broader perspective on financial performance and a deeper timeframe with respect to that performance, but also to demonstrate their compliance with the fiduciary requirements of prudence, loyalty and impartiality.

The second conclusion on governance structures is drawn from Chapter VI’s case study of the Murray Darling Basin. Chapter VI looks closely at the operation of the Murray Darling Basin Authority, the most recent incarnation of the body charged with governing the water assets of the Murray Darling Basin. The Authority must follow the procedures outlined in the Water Act (2007), which requires the Authority to determine the amount of water needed to meet the ecological needs of the basin, before allocating the remaining water to other uses. In essence, the Authority is required by statute to arbitrate between the competing interests of current and future users of the Basin’s water. The Authority’s findings have met with great political opposition – irrigators, and the communities reliant upon them, have objected stringently to the suggestion that their water entitlements be reduced in order to meet the ecological needs of the basin. The Australian government has taken a number of political measures in order to change the course of the Authority’s recommendations.

Chapter VI sees the Murray Darling Basin story as a cautionary tale about natural resource management. It concludes that a group of decision-makers charged with the management of natural resources over a long-term timeframe must have structural independence from the short-term incentives present in political battles. This independence may take a number of forms, but two examples of clearly independent decision-makers are first, judges, and second, trustees. In the common law jurisdictions in which this thesis is situated, the judiciary is constitutionally independent from the legislative branch of government. The trust provides a different, but similarly protective, structure for independent decision-making.

As this thesis has stressed, the trust has developed over hundreds of years as an institution of intergenerational wealth management; its inviolability is almost sacrosanct – the duties of trustees to their beneficiaries are protected not only by law but also by strong societal norms. That said, this thesis has also shown that where different beneficiaries of the same trust have different temporal interests, even the best-intentioned trustees face a great challenge. At times like these, a systematic means for determining how best to meet the various competing interests is very useful. The Authority had a structural means for navigating the interests of current and future water users: the Water Act, though far from perfect, provided legislative guidance on how to balance the competing needs of the ecosystem (securing the sustainability of the Basin for future water users) with those of current irrigators and their surrounding communities. What it lacked was the independence from political interference necessary to implement the decisions that it had made.

Implications for Theory

This thesis provides a running commentary on the theoretical implications of issues addressed. There are several salient implications for theory that should be restated here. First, bearing in mind the themes underlying this thesis (the spatio-temporal characteristics of environmental problems, short-termism, and the institution of the trust), an examination of institutional investment in the context of climate change makes clear the need for pension fund trustees to rethink their approach to investment, just as they did at the advent of modern portfolio theory. Chapter III delves deeply into the historical evolution of fiduciary duty alongside investment norms. Over time, investors (and the legal practitioners that judge their compliance with the requirements of fiduciary duty) have adapted to social change. This is often gradual – for example, trustees were at one time restricted to investing in financial products (such as bonds and gilts) enumerated on a short list; their freedom to invest has increased as theoretical understandings of investment have developed.

Both investors and legal practitioners tend to lag somewhat in their response to social change – as the House of Lords case Roberts v Hopwood demonstrates so eloquently, in the 1920s equal pay for women was seen as a culpable squandering of pension fund capital. Nonetheless, by the 1980s, Forbes J had stated, in a related case, that ‘some of their Lordships’ observations’ with respect to what investors may legitimately take into account ‘may … appear unsympathetic’. Times had changed – but rather more slowly than one might have hoped. We find ourselves at a similar juncture today with climate change. The social, environmental and financial implications of climate change require pension funds to adapt their approach to investment; as Chapter IV puts it, they must adopt not only a broader approach (considering in earnest the implications of relevant environmental and social issues on investment) but also a deeper one, in which the timeframe for investment becomes longer and more nuanced than the ubiquitous quarterly period.

The principle of intergenerational equity is developing in a peculiar way. Its somewhat esoteric legislative embodiment leaves one with the impression that the Australian legislators responsible for its coming into being had very little understanding of what it might become. Its development has been left in the hands of judges. Leaving aside the practical consequences of this distribution of powers with respect to the principle, the theoretical implications are fascinating.

In some ways, the development of the principle has become something of a democratic experiment: here is an unelected, independent body of decision-makers entrusted with interpreting the implications of principle whose potential (if not yet realised) reach is remarkably wide, and whose primary focus is advancing the interests of future generations. In particular, the nascent jurisprudence giving life to the principle of intergenerational equity might be able to test the theory that long-term (environmental) decisionmaking under conditions of inter-temporal choice and intergenerational conflict is best left up to decision-makers who are isolated from the short-term political demands of the electoral cycle.

Finally, the findings in this thesis have several implications with respect to the use of terminology. Academic and professional literature in the field of sustainable investing is suffused with competing and often confused terminology: is there any significant difference, one might ask, between the terms ‘ethical investment’, ‘socially responsible investment’, and ‘responsible investment’? There often is, but as Chapter IV points out, the terms are rarely understood consistently from one investor to the next (although the UN PRI has managed to achieve some level of consistency amongst investors with respect to the term ‘responsible investment’). This has two main implications for those contributing to the academic literature in this area.

First, given the general lack of consensus on the meaning of these terms, authors should have a clear understanding of the terms that they choose to use, and should be able to communicate their own interpretation of these terms to readers. Where possible, authors should allude to common reference points, such as the UN PRI. Moreover, terms like ‘ESG issues’ should be avoided where a more specific term or series of terms (for example, ‘greenhouse gas emissions’, ‘child labour’ or ‘corruption’) would provide a clearer insight. Second, rather than being an essentially contested concept that will thrive on ongoing debate over its philosophical origins, SRI is a confused a confusing term that should be broken down into its component parts. Different species of SRI (for example ‘responsible investing’ and ‘ethical investing’) would perhaps be more successfully advanced once distinguished from one another, so that their separate goals may be pursued with greater transparency and clarity of aim.

Further research

As the previous section stressed, this conclusion does not claim to be able to answer all of the questions raised throughout the thesis. Indeed, the findings of the thesis open a number of areas with potential for further research, the most important of which are outlined here.

Drafting Legislative Solutions

Drawing upon the context of the investment risks and opportunities presented by climate change, Chapter III argued for legislative clarification of the requirements of pension fund fiduciary with respect to environmental and social considerations within investment strategies. Beyond the scope of Chapter III was a discussion of the shape that such a legislative measure might take. This line of research could make a practical contribution to the wider policy debate that surrounds this area. While much of the research focusing on environmental, social and governance issues is directed toward establishing a correlation between these issues and financial performance, detailed accounts from a legal perspective are rare.

Legislative approaches from related areas of the law might prove to be instructive. For example, a future research project could examine relevant legislative provisions relating to directors duties: the UK’s Companies Act 2006 provides that a director not only can but indeed must have regard to ‘the impact of the company’s operations on the community and the environment’ when fulfilling his duty to ‘act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.’ The extent to which these clauses have been effective is not yet proven, but they nonetheless provide a starting point for more targeted legislative research. Much may be learnt from the legislative successes and failures that have occurred in this and other related areas of law.

Similarly, the legislative recommendations made in Chapter IV are general – details of the wording of the potential legislation with respect to safe harbors and comply or explain procedures have been left as an area for future research. Here again, existing legislation from a related area could help to formulate an appropriate legislative approach. Legislative safe harbors under ERISA have been used in the US to provide trustees with a degree of certainty of compliance with their fiduciary obligations with respect to defined contribution default plans, the design of these legislative provisions might prove instructive. The design of legislative provisions necessary for the introduction of a ‘comply or explain’ process with respect to sustainable investing could draw upon existing legislation with respect to corporate governance within the UK.

Deepening our Understanding of Fiduciary Duty

A second area for further research is within fiduciary duty itself. This thesis, and the legal academic literature in the field of institutional investment more generally, has focused on the main two fiduciary duties: the duty of prudence and the duty of loyalty. In addition, this thesis has provided a limited review of the duty of impartiality, and mentions a range of other duties in passing. Further research is needed to examine why the other duties are so rarely examined in academic literature, and how they are treated by courts. If these duties have disappeared from usage, then it may be useful to examine why.

Case law involving pension funds would provide the primary focus for this research, but jurisprudence with respect to directors and other fiduciaries could provide another source of information. The findings of this research would make an important academic contribution – the academic research on fiduciary duty is sparse, and rarely goes into much depth even with respect to the duties of prudence and loyalty. Beyond academia, the findings could provide a valuable insight for pension fund trustees, giving them a fuller understanding of their fiduciary duties.

More generally, further research is required into how fiduciary duty operates over time. Specifically, where pension fund trustees are faced with inter-temporal questions and situations of intergenerational conflicts of interest between beneficiaries, how should these conflicts be resolved? And how should trustees improve their capacity to think about longer term risks, opportunities, and performance. Building upon the findings of this thesis, what are the legal and governance structures that can be put in place in order to ensure that the temporal dimensions of fiduciary duty are met?

Final remarks

This thesis has drawn together a range of responses to the question ‘how can the law extend the timeframe for environmental decision-making?’ in the contexts of institutional investment and public environmental decision-making by legislators, the judiciary, and administrators. Drawing upon the three themes that underlie all of the substantive Chapters (the spatio-temporal peculiarities of environmental problems, the spectre of short-termism, and the institution of the trust), this thesis has articulated potential legislative changes, provided a number of legal and institutional reflections, recommended the adoption of particular governance structures, and explored the findings’ implications for theory. It is a large project, and although it is presented here as a contained set of explorations and findings, it has opened the door to further targeted academic research.

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