Fiduciary Duty and Incentive Systems

Institutional Investors’ Fiduciary Duty
Tommy Gärling, Joakim Sandberg
Aims to assess the extent to which the obligations that large financial institutions (e.g. pension funds) owe towards their beneficiaries (e.g. future pensioners) constitute an impediment to their effective engagement in sustainable investing. Our in-depth legal analysis suggests that fiduciary duties indeed hinder effective sustainable investing as they are formulated in contemporary law. Moreover our theoretical-explorative work suggests that it is difficult to fix this problem by any simple reformulation of those duties. Sustainable investing simply cannot be expected to always be in the interests of beneficiaries (irrespective of whether one understands these interests as financial, social or ethical). The project aims to make clearer both the current legal reality and the political possibilities for the future, which may help both legislators and representatives of the financial institutions.

A legal framework for fiduciary responsibilities encompassing the integration of SRI/ESG criteria
Sebastian Siegl
The legal interpretation of how the use of SRI/ESG considerations relates to the fiduciary duties for institutional investment managers’ is unclear. To some extent this follows from the fact that the rationale used to motivate a new interpretation has largely been based on arguments related to the financial performance of SRI/ESG investment strategies. While the financial performance of SRI/ESG strategies is of paramount importance within the existing framework, a new framework could be based on other parameters such as a widened interpretation of the concept of “interest of the beneficiary” and a clear framework for SRI/ESG information disclosure. Either way it needs to be clarified how the inclusion of SRI/ESG criteria should be made not to conflicts with fiduciary duties.

Impact of Value on SRI Practice: A Comparison of Financial Professionals & Beneficiaries
Ralf Barkemeyer, Frank Figge, Andrea Liesen, Tobias Hahn, Frank Müller, Andreas Hoepner
We have finished a pilot survey into perceptions of SRI practitioners and will send out the final survey in late 2011. We are currently updating the Trends in Sustainability database, which will be launched in early 2012. We have also collected a large database of independent variables, which will be used to analyse and explain different sustainability agendas in different countries. We are also generating a database of international SRI practice, which will be ready by the end of 2011. Practitioners will benefit from the identification of issue areas in which there is a mismatch between the sustainability-agendas of SRI practice and those of their beneficiaries. The Trends in Sustainability tool will appeal to both the SRI community as well as a wider layperson’s audience.

Fiduciary Duty, Future Scenarios and Value Priorities among Beneficiaries of Pension Funds
Magnus Jansson, Joakim Sandberg, Anders Biel, Tommy Gärling
Aims to identify value priorities among beneficiaries of pension funds, taking into account temporal distance to time of retirement and dependency of future pension. A mail survey to a general sample of a net size of 1,000 Swedish future pension fund beneficiaries will address changes in value priorities and potential trade-offs between sustainability values and individual financial outcomes during the adult life cycle. Provided that value priorities change during the life cycle, investment institutions could vindicate a broader mandate in their fiduciary duty.

Global Surveys and Experiments
Rob Bauer, Paul Smeets, Arno Riedl, Piet Eichholtz, Nils Kok
To understand the behaviour of individual investors with regard to socially responsible investing, we completed a large-scale research project in cooperation with Robeco. We surveyed and conducted experiments with about 3,000 individual investors on socially responsible investing and related issues. The project will give insights into the reasons why investors buy socially responsible mutual funds and what keeps other investors from not buying them. We will also provide insights into the optimal marketing strategies that can be used by mutual fund families and banks to increase the number of socially responsible investors. The second project involves the Global Real Estate Sustainability Benchmark (GRESB), which is the first global effort to survey real estate companies and funds on their environmental and social performance.

ESG Factors and Investment Decisions
Jonas Nilsson
Deals with the role of ESG factors in the decision making of investors. The overall aim is to increase knowledge on how investors combine financial and ESG factors when making the decision to invest according to sustainable principles. Results indicate that ESG factors are important to retail investors as ESG factors increase satisfaction with mutual funds. However, the complexity of the marketplace is a significant challenge for investors that wish to include sustainability in their investment decision. Moreover, investors do not seem to be consistent in their ESG preferences as they show considerable support for many (sometimes opposing) ESG strategies. This insight can help providers of SRI to produce better services and tools for decision-making.

Sustainable Governance among Swedish Pension Funds
Ian Hamilton
Examines how two different responsible investment strategies emerged among five national pension funds as a response to the national directive for responsible investment. Strategies on how to integrate environmental, social, and governance (ESG) factors in investment decision making are important for pension funds as they traditionally have focused on values-based risk management and seldom on the profit- or alpha-seeking opportunities of integrating ESG with the financials. The diversity of the pension system in Sweden allows the study to compare a national systems-oriented pension plan (income pension system) with a market-oriented (premium pension system). The main conclusion of this study is that the characteristic of pension schemes will have implications for how pension funds interpret and execute their fiduciary responsibilities given the exact same directive.

Shareholder Activism, Corporate Governance and the Board of Directors
Rob Bauer, Frank Moers, Lei Chen, Michael Viehs
The overall aim of this project is to study whether shareholder activism and quality of the board of directors are effective governance tools. The results of this paper series will be beneficial for several parties, namely corporate managers, investors, and regulators. Our papers show how investors can monitor corporate managers, and which necessary steps can be undertaken by regulators to enhance the efficiency of corporate governance. Furthermore, we show the consequences of externally imposed regulations on the functioning of the board of directors. This project comprises several papers: three of them deal with shareholder activism and its effectiveness, while one describes the labour market for independent directors.

Impact of Incentive System and Monitoring Frequency on Portfolio Managers’ Investment Decisions
Tommy Gärling, Maria Andersson
Surveys show that practice in Sweden is to incentivize portfolio managers based on short-term performance. In general people prefer to reap immediate benefits. This is confirmed by the results of our experiments in that short-term bonuses paid out every year are preferred to nominally equally large long-term bonuses. We have also shown that shorter evaluation intervals lead to worse performance than longer evaluation intervals. A third question addressed during 2011 is whether investors diversify portfolios by taking both short-term and long-term value development into account.

Incentive Schemes for CSR Asset Management – Delegated Portfolio Management in a Dynamic Setting
Stefano Herzel, Annalisa Fabretti, Marco Nicolosi, Fausto Gozzi
The objective of this project is to formulate a theoretical model for the study of the incentive systems for CSR Asset Managers. Under the working hypothesis that it is possible through the active management of a SR fund to obtain financial performances that are comparable or even better than those of a conventional fund, we propose a way to set the incentives according to the skill of portfolio managers and to the difficulty of their task. An important aspect of the project is the empirical validation of the hypothesis.