Many obstacles stand in the way of long-term environmental decision-making. Individual behavioural biases, short-term financial incentive structures, the myopic pressures of the electoral cycle and the tendency of the common law to reinforce the (often short-termist) status quo all present significant barriers to the capacity of both private and public decision-makers to act in ways that favour the longer term interests of the environment. Nonetheless, this thesis argues that there is reason for hope: it has presented evidence that legal and governance structures may help to overcome these obstacles. It has outlined how legal and governance structures can extend timeframes for environmental decision-making within the contexts of institutional investment by pension funds and public environmental decision-making by legislators, the judiciary, and administrators.
These two contexts differ in many respects, but are bound by the three central themes that underlie the thesis: in both contexts, the temporal and spatial characteristics of environmental problems present their particular challenge; in both contexts short-termism is present and powerful; and in both contexts the legal notion of the trust becomes a valuable means for analysing and addressing problems of a long-term or intergenerational nature. The ways in which these themes have influenced the substantive Chapters of this thesis are elaborated below. The themes have borne upon the proposed changes to legal and governance structures outlined in the thesis’ various conclusions, which are set out in the section that follows. Finally, the themes underlie and bind the implications and opportunities for further research that proceed from the findings of this thesis.
Temporal and spatial challenges loom large
This thesis has emphasised that the spatio-temporal peculiarities of environmental problems create a particular dilemma for decision-makers both in the pension fund investment and in public policy. From a temporal perspective, environmental problems tend to require effort and funding up front to provide a solution whose beneficial impact will be felt in the (sometimes distant) future. In the context of climate change (the backdrop to Chapters III in particular, but relevant to the other Chapters as well) this means that the burden of the solution will be borne by the current generation and the benefit will be felt by future generations.
Conversely, should the current generation choose to ignore the problem, it will often avoid both the expense of the solution and the consequences of inaction – these will be experienced instead by citizens of the future. Some environmental problems are also spatially complex. This is particularly true of climate change, where the most severe physical and social impacts are expected to occur in developing countries, despite the fact that greenhouse gas emissions have originated primarily (at least until very recently) from developed countries.
In institutional investment, financial performance of funds is of paramount importance. Environmental impact is often not aligned with financial returns: appropriate legislation may be lacking – for example, carbon dioxide emissions may be free; environmental issues almost inevitably operate over a longer term timeframe than most investment horizons can conceive – a corporate environmental policy may pay off in ten years time, by which time most investors have long since moved on). It is for this reason that some academics have argued for a (re)turn to ethically motivated pension fund investment. Even if this works for some pension funds, it cannot work for all.
If business that creates environmental collateral is profitable, then some pension funds are likely to be attracted to it. Likewise, pension funds cannot be expected to support industries or companies with admirable environmental practices that fail to provide a return for their beneficiaries. The point here, as Chapters III and IV strongly conclude, is that pension funds cannot, on their own, overcome the obstacles to sound financial decision-making posed by the spatio-temporal peculiarities of environmental problems. The legal and governance solutions put forward in these Chapters rely not only on the actions of pension funds, but also on government initiative.
The spatio-temporal complexities of environmental problems could not be starker than in Australia’s Murray Darling Basin. Chapter VI describes the Basin’s spatial characteristics: it is a river system roughly the size of France and Spain together in which the actions of upstream water managers have a profound impact on inhabitants of the downstream water users. The system operates across six different jurisdictions, whose squabbling might well adorn the pages of a textbook on the tragedy of the commons. From a temporal perspective, the Basin presents a classic problem of inter-temporal choice, a working example in the ethics and practice of intergenerational equity. In the Basin system, as Chapter VI demonstrates in detail, current water use must be reduced in order to preserve the Basin’s future productive and environmental integrity. In both cases, any effective solution will require a current sacrifice in order to improve future outcomes. The conclusions to Chapters Three and Four are cognisant of the demands that these special characteristics place on any legal or governance solution, noting in particular the need for robust institutional structures.
Short-termism casts a long shadow
Short-termism casts a long shadow over the social sciences. From the behavioural biases that compel individuals to favour short-term outcomes in certain situations, to the incentive structures that motivate financial professionals on the one hand and political leaders on the other, to the institutional barriers that preserve and sometimes sanctify short-term predilections, short-termism is both insidious and ingrained. This thesis has demonstrated that it is an issue particularly relevant to environmental decision-making, both within the world of institutional investment, and in the within public policy. The substantive Chapters of this thesis articulate the dangers that such short-term focused attitudes present to the long-term integrity of environmental systems.
One could be forgiven for assuming that institutional investment is built upon a conscientious intellectual focus on the short-term; investors construct the quarterly performance timeframes within which they assess their investment universe. Here, the term ‘investment universe’ is apt: the world viewed through such a frame is a very different one to the one in which the natural environmental exists. In reality, though, Chapters III and IV demonstrate that the timeframes of institutional investors are constructed by both conscious and unconscious factors, reinforced by legal rules and norms (and their interpretation), and by governance practices. Chapter III, in particular, outlines the behavioural biases that often cause individuals to prefer shortterm rewards and the incentives aligned with quarterly performance, encourage investors to focus their decision-making on drivers of short-term profit.
It concludes that an outdated interpretation of fiduciary duty (in essence, the view that trustees’ duty to beneficiaries is to maximise financial profit, measured on a quarterly basis), as well as legal practice, reinforce these short-term tendencies. Chapter IV demonstrates that many pension funds lack the appropriate governance structures to think about broader, longer term environmental and social issues in a systematic way. As a result, the trustees are left in a state of confused trepidation that prevents their moving toward newer and more sustainable approaches to investment. These Chapters conclude short-termism in institutional investment is difficult but not impossible to overcome.
Public decision-makers are also dogged by incentives to favour short-term solutions to problems. This thesis has argued that legislators and administrative decision-makers often face intense pressure from constituents and stakeholders to pursue policies or projects that will provide them a tangible benefit. This is, of course, a natural part of democracy. Democracy in its current incarnation is ill-equipped to deal with problems of inter-temporal choice. Chapters V and VI examine potential legal means to overcome the short-term incentives of public decision-makers. The two Chapters delve deeply into the related concepts of intergenerational equity and the Planetary Trust; both concepts which have at their heart the notion that within trust law might be found a means for the current generation to hold environmental assets on behalf of future generations.
These Chapters conclude with a significant amount of optimism about the ability of one category of public decision-maker – the judiciary – to take a longer term timeframe when considering environmental questions (all the while acknowledging the structural independence that judges must have in order to achieve longer term thinking). The recommended legal reforms and structural changes to governance with which all the substantive Chapters of the thesis conclude are suffused with an understanding of the centripetal forces acting constantly upon the timeframes of decision-makers in both contexts.
A matter of trust
The common law concept of the trust is essential to this thesis. It provides a conceptual foil – with no legal notion does the idea of intergenerational wealth transfer sit more elegantly – and the legal structure at the core of two vital institutions: the pension fund and the Planetary Trust. The trust institution is conceptually valuable because it presents a unique way of thinking about wealth, whether that wealth is the capital of a pension fund or the water resources of the Murray Darling Basin.
It is conscientiously unique – as Chapter III recounts, the trust was developed in feudal England as means for avoiding the unjust property outcomes that resulted from the operation of existing law. In its earliest incarnation, the trust was a vessel through which a property owner could ensure that his property was preserved for his underage heirs in the case of his death – in effect preventing guardians from spiriting the property away. Trustees manage funds primarily for the future, something which presents a challenge on not only an evidential level (the future is always uncertain, and performance becomes more uncertain as a timeframe extends), but also from the perspective of behavioural psychology.
As well as providing a valuable conceptual foil, the trust provides the legal structure for two of the central institutions presented in this thesis. The first is the pension fund. In the pension fund, the trust exists on a much grander scale than it did in feudal times. With greater scale comes greater complexity – pension fund trustees are charged with managing huge pools of capital over timeframes that may extend as far as forty years. Within a fund, beneficiaries needs differ depending on when they are likely to retire. For this reason, pension fund trustees often face significant intertemporal choices with respect to the management of the funds. The trust is bound by legal requirements, the most significant of which are the fiduciary duties that trustees owe to beneficiaries.
These duties frame the way that trustees think about investment, and have proved to be of great consequence for the findings of this thesis. The second trust-based institution at the heart of the thesis is that of the Planetary Trust. This institution is rather more esoteric than the pension fund; it remains, largely, theoretical: a notion that the current generation holds the planet on trust for future generations. Nonetheless, its inventor, Edith Brown Weiss, was adamant that it had the propensity not only for institutional form but also for function. It is with this in mind that this thesis approached its case study of the Murray Darling Basin Authority, and found within the Authority many of the elements essential to the Planetary Trust.
While this thesis is at times very critical of the Planetary Trust, it is this notion that perhaps best captures the hope of the thesis. Hope – just that. Practically speaking, the Planetary Trust provides little comfort. Its practical flaws are too significant for it to become a realistic means for addressing environmental problems into the future. Its practical incarnation, as reflected to some extent in the Authority, demonstrates the very intergenerational conflict that it was designed to avoid. It reinforces the conclusions made throughout this thesis that certain legal and governance structures – for example, safeguards for the independence of those charged with environmental decision-making – are necessary in order for the timeframes of decision-makers to extend beyond the short-term.
Nonetheless, it is the Planetary Trust concept that draws together the themes that underlie the thesis. It was created as an institutional means for addressing environmental problems, and in full knowledge of their particular spatio-temporal characteristics. It was designed to overcome short-termism by privileging long-term natural resource management. Finally, it is anchored in trust law – an area of law that is imbedded with intergenerational principles.
Implications and solutions
Bearing in mind these intertwined themes, this thesis has reached a number of conclusions about specific changes to legal and governance structures that should be made in order to extend the timeframe for environmental decision-making, both in the context of institutional (especially pension fund) investment and in the context of public environmental decision-making by legislators, the judiciary, and administrators. These solutions are diverse, and have been grouped for the purposes of this conclusion into four categories: legislative changes, legal and institutional reflections, governance structures, and theoretical implications. It should also be said that they can make no claim to being comprehensive – they are designed to address the specific questions asked in each of the substantive Chapters of the thesis. It should be borne in mind that while the implications of these solutions may be broad, the ambit of influence of environmental issues is broader still.
The first legislative change proposed is in the context of pension fund fiduciary in the UK and the US. Chapter III argues that in theory, the fiduciary duties of prudence and loyalty should not prevent pension fund trustees from considering the environmental and social impacts that climate change is likely to have on their investments (and indeed, to the extent that these environmental and social impacts also have a financial impact, fiduciary duty should compel their attention to these issues). However, it finds that a one-dimensional but highly publicised judicial interpretation of the fiduciary duty of loyalty as requiring the maximisation of financial benefit to the exclusion of all other considerations, and the lack of recent case law on the subject, has led to uncertainty about the legality of having regard to environmental and social impacts.
This has left pension fund trustees reluctant, or unwilling, to rethink their investment strategies in the light of climate change. This inertia is exacerbated by behavioural biases toward the status quo and reinforced by an approach to the fiduciary duty of prudence that involves evaluating investors’ decisions against those of their peers, discouraging deviation from accepted behaviour. As a result, Chapter III concludes that legislation should be enacted in both jurisdictions, clarifying that an investment approach which has regard to the environmental and social impacts of prospective investments is not in and of itself inconsistent with the requirements of fiduciary duty.
A second set of proposed legislative changes, intended to encourage sustainable investing, is set out in Chapter IV. While much of the regulation relating to investment may be viewed as aimed at preventing harm, there are a number of legislative measures that could act as ‘enablers’ of constructive behaviour. Once again, the recommendations made here are broad – they leave the details of the proposed legislative clauses as a project for further research – but they nonetheless sketch an opportunity for positive reform. First, legislation could be enacted to introduce ‘safe harbour’ principles, which would create incentives for sustainable investing by preventing litigation against trustees who choose to adopt a sustainable investing approach (while following due process and acting in good faith).
Second, legislation could introduce a ‘comply or explain’ process with respect to sustainable investing. Under this approach, legislators would encourage pension funds to think of sustainable investing as a norm, by requiring them to either comply and adopt aspects of a sustainable investing approach, or provide a written explanation detailing why they have chosen not to comply and for what period. This approach portrays sustainable investing as legislatively sanctioned, while allowing an alternative line of action to be pursued subject to explanation.
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