Sustainable investing has been perceived as sacrificing some financial return is the belief that fiduciary duty means focusing only on returns—thereby ignoring ESG factors that can affect them, particularly over time. However, more recent legal opinions and regulatory guidelines make it clear that it is a violation of fiduciary duty not to consider such factors. Although adoption of this new understanding has been slow in the United States, other countries, such as Canada,the UK,and Sweden, are taking steps to redefine the fiduciary duty concept. On November 28, 2018, the Swedish parliament approved major reforms requiring the four main national pension funds to become “exemplary” in the field of sustainable investment. As Will Martindale, head of policy at PRI, bluntly put it to shareholders, “Failing to integrate ESG issues is a failure of fiduciary duty.”
conclude that action is needed to modernise definitions and interpretations of fiduciary duty in a way that ensures these duties are relevant to 21st century investors. A single coherent, verifiable standard for measurement will expose ‘impact washing’ – the biggest threat to building investor trust – and boost assets to a point where we can plug the financing gap to achieve the SDGs.
The financial sector is a powerful actor in fighting climate change, achieving the SDGs, implementing the 2030 Agenda and the Paris Agreement. The early question was whether fiduciary duty is an outdated perception, a custom and a practice or a legitimate barrier to integrating environmental, social and governance (EDG) factors in the investment processes and investment decisions. Fiduciary duties are imposed upon a person or an organisation who exercises some discretionary power in the interests of another person in circumstances that give rise to a relationship of trust and confidence ()
A 2005 UNEP report, prepared by law firm Freshfields Bruckhaus Deringer concluded that integrating ESG considerations into investment analysis is “clearly permissible and is arguably required.”
Four categories of mega-trends were seen as creating both risks and opportunities: (i) environmental (climate change and resource scarcity disrupt supply chains and markets, but also create new investment opportunities, such as in renewable energy technologies); (ii) social (demographic trends shift the distribution of human capital, affect labour markets and the sustainability of existing pension schemes, but also open new markets, while growing inequality presents increasingly serious systemic risk); (iii) technological (disruptive technologies in the short to medium term threaten to eliminate traditional jobs and sources of income, but in the longer term contribute to productivity improvements and create new opportunities); and (iv) geopolitical (political polarization and disruption of the multilateral world order). Executives noted that public policy and market solutions designed to address the challenges raised by any of these trends must simultaneously consider their consequences for other ones, to optimize the overall positive impact on the “state of the world.”
The SDGs can, therefore, be seen as an “ESG+” policy framework that provides some guidance as to the potential direction of travel for public policy and markets in these areas. (SSE, 2019) The demand for information related to the ESG matters has increased greatly, driven by the fast change in market conditions and increased material risks. In 2008, only one societal risk — pandemics — was listed among the top five risks in terms of impact. In 2018, four of the top five risks listed in that same category were environmental. These risks included extreme weather events, water crises, natural disasters and failure of climate-change mitigation and adaptation. (DFIN, 2019)
