From Fiduciary Duties to Fiduciary Relationships for Socially Responsible Investment

Abstract

Debates about the legality of socially responsible investing (SRI) with regard to institutional investors’ fiduciary duties have focused on whether SRI is “financially material” to investment performance. This article examines the less considered question of whether SRI may also be legally permissible if it fulfills the will of the beneficiaries in a fiduciary relationship. It argues that by reframing fiduciary finance as an active relationship rather than merely the mechanical application of legal duties, we may allow trustees to invest socially pursuant to the wishes of beneficiaries. However, this article also suggests that considerable legal and practical obstacles confront this path to SRI. They include trustees’ duty to treat different beneficiaries even-handedly and the traditionally passive role fiduciary law has cast beneficiaries. Reliance on widely-held social customs and evaluation of third parties’ interests as a proxy for the will of beneficiaries, and the role of statutory reforms mandating consultation with and representation of beneficiaries on the governing boards of trustees, are also considered in this article. It concludes by suggesting some potential legal reforms to strengthen reliance on the will of beneficiaries as a means of SRI.

Keywords: Fiduciary Duties, Socially Responsible Investment, Democratic Processes

JEL Classification: G20, G28, K20, K22, M14