Compared to much of the sustainability lexicon, "fiduciary duty" may sound decidedly dull.
But for sustainability — measured as an outcome in the economy, not the growth of a profession or product lines — fiduciary duty is more material than any buzzy concept du jour.
Firms will (or perhaps increasingly won’t) make bold claims about their climate commitments, but they’re likely to be buried in the annals of announcements-sans-delivery if the role of fiduciary duty doesn’t get proper attention in mainstream sustainability discourse.
The current context: Red-state treasurers are attacking ESG; major American banks are feeling their feet freezing up on restricting fossil fuel finance; and concern is growing that "green crowding" (a new one for the sustainability lexicon), where firms hide in the herd of member groups and move with the lowest performer, will slow progress even further.
For many activists, the Glasgow Financial Alliance for Net Zero was never more than well-produced talk. The freedom for members to decide whether they will align with the U.N. guidelines on fossil fuel financing phase-out even has Ben Caldecott, founding director of Oxford University's Sustainable Finance Group, saying, "This begs the question of what the criteria to be a member of GFANZ is."
But the many trillions of dollars committed to net-zero aligned investments are at real risk of missing the moment and seriously damaging the credibility of voluntary action on climate risk from the finance sector without heavier policy sticks.
The takeaway: Interpretation, or misinterpretation, of fiduciary duty is a key throughline.
Catching up with the 21st century
Who, again, is a fiduciary, what is their duty and why does it matter for ESG?
Fiduciary duty exists when someone places trust in another person or institution whose advice, protection or aid is sought. If you hire a lawyer, for example, fiduciary duty legally binds them to advocate in your best interest, like proving your innocence and not botching the case for a lucrative payoff from the plaintiff’s family.
When you hand your money over to investment firms to manage, the firm is bound by fiduciary duty manage those funds with future-you’s benefit as a decision-making guide, following duties of care and loyalty.
If investment risk is climate risk, as the world’s largest money manager sees it, and the changing climate is already and will continue to affect businesses’ ability to create value, then money managers need to invest for a real economy that produces value for future-us.
The idea that fiduciary duty in a financial relationship means that maximizing profit is the primary consideration is an unfounded orthodoxy ...
This is where the interpretation of fiduciary duty, particularly in the United States, hits a headwind when it comes to ESG risk considerations.
In a letter to BlackRock this summer, 19 Republican state attorneys general asserted that the use of ESG information in the asset manager’s strategies is a breach of the firm’s fiduciary duty to pension fund beneficiaries, as the asset manager may be in violation of laws regarding maximizing financial returns to investors and the fiduciary duties of loyalty and care.
But the idea that fiduciary duty in a financial relationship means that maximizing profit is the primary consideration is an unfounded orthodoxy, and, as former Deputy Secretary of the U.S. Treasury Sarah Bloom Raskin told me on stage at GreenFin 22 this year, it’s part of a fundamentally anti-capitalist ethos coming from a socialist-fearing GOP.
Institutional investors in the United States are regulated by laws that apply the "modern prudent investor rule," which incorporates both a duty of care and loyalty, and emphasizes modern portfolio theory, a formalization and extension of the idea of diversification in investing.
But with the prudent investor rule, there is no duty to maximize the return of individual investments but instead a duty to "implement an overall investment strategy that is rational and appropriate to the fund."
If climate risk is investment risk, ESG considerations seem solidly appropriate.
Sue the bastards?
As Ivan Frishberg, chief sustainability officer at Amalgamated Bank, the first U.S. bank to join the U.N. Principles for Responsible Banking, told me, "We don't need to change fiduciary duty. There’s already a role for ESG risks."
What we’re dealing with is not a matter of flawed legal text, but rather what Oxford professor Bob Eccles identifies as "law that has morphed into ideology." Or, what the Roosevelt Institute describes as a fiduciary duty conception that distorts beneficiary interests into a narrow focus on financial returns, resulting in investment decisions that reinforce "a system that is antithetical to the needs of the very households whose savings are being managed."
The wave of red state anti-ESG attacks is likely ephemeral political posturing. But it’s not just those behind the letter from Republican state attorneys general who are falling back on this law-cum-ideology to shirk climate duties.
Large emitters say they’re all-in on net zero, but they lobby governments to thwart climate ambition. Large investors say they’re all-in on net zero but their commitments are contingent on government action to introduce policies consistent with holding temperature increases to 1.5 degrees Celsius. The government doesn’t deliver, so investors say they’ll take the lead — but they also say their job is to be a fiduciary to clients not to force outcomes in decarbonization.
What about the beneficiaries, the future-us who will own the assets in a climate-constrained world — the ones on the vulnerable end of fiduciary duty? Understandably, they’d like their money invested in line with a 1.5 C future state, especially younger folks with a longer investing horizon.
Climate change is a moral challenge, but the economic ship won’t really change course in our system without some painful costs. Which, according to insurance advisor Willis Towers Watson, may well be in the pipeline:
"Directors should ask themselves which presents the greater risk — that they may draw censure for taking actions that compromise the company’s near-term profitability or face personal liability if they fall short of addressing climate risks (including the physical, transition and liability risks) and ensuring long-term sustainability of the company. Legal opinion increasingly points to the latter."