Fiduciary Duty in the 21st Century
Investors that fail to incorporate environmental, social and governance (ESG) issues are failing their fiduciary duties and are increasingly likely to be subject to legal challenge.
Governments, regulators, and investors around the world describe how they are supporting the updated conception of fiduciary duty.
Governments, regulators, and investors around the world describe how they are supporting the updated conception of fiduciary duty.
Former US Vice President and Chairman of Generation Investment Management, Al Gore, introduces the Fiduciary Duty in the 21st Century programme, which finds that, far from being a barrier, there are positive duties to integrate environmental, social and governance factors in investment processes.
Fiduciary duties exist to ensure that those who manage other people’s money act in their beneficiaries' interests, rather than serving their own interests. The manner in which fiduciary duty is defined has profound implications.
Some institutional investors believed that environmental, social and governance (ESG) issues were not relevant to portfolio value, and were therefore not consistent with their fiduciary duties. This assumption is no longer supported.
Decisions made by fiduciaries cascade down the investment chain affecting decision-making processes, ownership practices, and ultimately, the way in which companies are managed.
This project contributes an extensive evidence base to end the debate on whether fiduciary duty is a legitimate barrier to the integration of environmental, social and governance issues in investment practice and decision-making. Additionally, the roadmaps set out recommendations to fully embed the consideration of ESG factors in the fiduciary duties of investors across ten capital markets.
Some institutional investors believed that environmental, social and governance (ESG) issues were not relevant to portfolio value, and were therefore not consistent with their fiduciary duties. This assumption is no longer supported.
Decisions made by fiduciaries cascade down the investment chain affecting decision-making processes, ownership practices, and ultimately, the way in which companies are managed.
This project contributes an extensive evidence base to end the debate on whether fiduciary duty is a legitimate barrier to the integration of environmental, social and governance issues in investment practice and decision-making. Additionally, the roadmaps set out recommendations to fully embed the consideration of ESG factors in the fiduciary duties of investors across ten capital markets.
Modern fiduciary duties of investors require them to:
- Incorporate financially material ESG factors into their investment decision making, consistent with the time-frame of the obligation.
- Understand and incorporate into their decision making the sustainability preferences of beneficiaries/clients, regardless of whether these preferences are financially material.
- Be active owners, encouraging high standards of ESG performance in the companies or other entities in which they are invested.
- Support the stability and resilience of the financial system.
- Disclose their investment approach in a clear and understandable manner, including how preferences are incorporated into the scheme’s investment approach.
There are three main reasons why the fiduciary duties of loyalty and prudence require the incorporation of ESG issues: i) ESG incorporation is an investment norm; ii) ESG issues are financially material, iii) policy and regulatory frameworks are changing to require ESG incorporation.
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