Can Investors Save the Planet? - NZAMI and Fiduciary Duty

Abstract

Asset manager signatories of the Net Zero Asset Manager Initiative, part of the Glasgow Financial Alliance for Net Zero, have committed to investing in line with the Race to Zero goal of limiting global warming to 1.5oC with limited or no overshoot. Given that a recent report from United Nations Environment Programme says that there is “no credible pathway” in place to 1.5oC, we explore the implications for asset managers, as fiduciaries, of investing in line with a climate scenario that might now be considered an unlikely future outcome. We assess common “net zero aligned” investment strategies such as portfolio decarbonisation, tilting, active ownership, ESG integration, and impact investing by reference to considerations of fiduciary duty and real-world efficacy at combatting climate change. We find that the more likely a strategy is to deliver real-world change in carbon emissions in line with the 1.5oC goal, the more likely it is to give rise to fiduciary concerns. Although these fiduciary concerns are unlikely in most cases to give rise to enforceable legal liability, it is likely that many asset managers, when applying an expected standard of fiduciary duty, will conclude that such strategies are not consistent with that duty in the absence of an explicit authorising mandate from clients. As a result, the strategies most likely to be adopted are also the least likely to contribute meaningfully to addressing climate change.We set out ways in which the commitments could be reframed so as to maximise real world impact of the initiative in the fight against climate change, while avoiding conflicts with the fiduciary duties of signatories. Key to this is aligning commitments to a more realistic climate scenario than 1.5oC with limited or no overshoot.

Keywords: Asset management, Net Zero, Investment Strategies; Fiduciary Duty

JEL Classification: G23, K22