Thoughts

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Is Investing towards 1.5℃ a Fiduciary Duty?

Thoughts

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    EVORA

To begin with, it is important to understand exactly what a fiduciary duty is within the world of investment. Fiduciary duties exist to ensure that those who manage other people’s money act in their beneficiaries’ interests, rather than serving their own interests. For example, an investment manager must invest their client’s money in a way that drives the best returns for the client rather than benefiting the profits of the institution. For the most part of the 20th century, ESG investing was at odds with fiduciary duty as these types of funds often return worse profits than more traditional options.

In 2019, the UN published a landmark report entitled ‘Fiduciary duty in the 21st Century’ which demonstrates the organic nature of the duty and that it is essential for its evolution alongside changes in society. The report concluded that “Failing to consider all long-term investment value drivers, including ESG issues, is a failure of fiduciary duty”. This means the long-held assumption by institutional investors, that ESG issues are irrelevant to their portfolios, is no longer supported.  And more controversially investors who are not delivering on ESG issues are failing in their fiduciary duty.

This concept extends the idea of fiduciary duty past monetary returns and redefines the concept of duty of care to the beneficiary’s care and relationship to the state of the environment. Instead of fiduciary duty acting in conflict with ESG, investment choices ought to be pursued to align with the 1.5°C scenario. In concept, this idea seems logical to the majority of the population who share environmental concerns. However, the beneficiary is incurring the full costs of this style of investment choice. Meanwhile, collective action to achieve the 1.5°C scenario is beginning to look more like a distant dream due to the stark lack of governmental regulation and policy in the highest polluting nations. While the UNEP FI’s findings are thought-provoking and impactful to a certain extent, without the backing of a tighter Paris Agreement to secure a 1.5°C scenario, the new age fiduciary duty again directs responsibility and costs onto the individual rather than the collective.  

Read the final report here.