Sustainable Fiduciary Duties – the Time Has Come for Financial Fiduciaries to Adapt to the New Climate Reality

Abstract

There is increasing debate about the role of fiduciaries in the context of the climate and nature loss crises. Some suggest that asset managers and fiduciaries should focus solely on maximizing financial returns. Others take the view that they should actively pursue climate mitigation and sustainability in their investment policy. But are these views really contradictory? A recent study by EDHEC estimates that assets will lose 40% (NPV) of their value as a result of climate damage (such as transition and physical risks) if we continue on our present course – much less if effective climate mitigation measures are taken, but much more if tipping points occur. This loss will be priced in sooner or later, gradually or in shocks. This is a material financial risk for investors. Consistent with this, a series of recent studies by the British Institute and Faculty of Actuaries, US National Bureau of Economic Research, and others, point to a loss of GDP as much as 30-50%, as a result of the increasing probability of climate tipping points and cascading events creating existential risks of economic collapse and societal instability. 

In this light, there is no longer any inconsistency between these two perspectives. Preserving and maximizing financial returns on investment means actively pursuing climate mitigation, and ensuring that investee companies and public authorities do so, too. 

The key points in this paper are two: the importance of market failure as a cause of the climate change and nature loss crises; and the recognition of the role existing principles of fiduciary duties can play to help solve this market failure, by avoiding the associated prisoners’ dilemma.