FIDUCIARY DUTY AND ESG CONSIDERATIONS – ARE THEY COMPATIBLE? A case study on institutional investors and their commitment to the Net-Zero Asset Owner Alliance

Abstract

As a response to the issues regarding climate change, several organizations and initiatives are founded to tackle them, such as the Net-Zero Asset Owner Alliance (AOA), backed by the United Nations. The explicit goal of the institutional investors in this alliance is to decarbonize their portfolios by 2050. However, these institutional investors are subject to the fiduciary duty to prudently manage the capital of their beneficiaries in the best interest of these. Since this traditionally interpreted as ensuring or maximizing a high financial return, the problem arises whether the goal of this alliance is compatible with the fiduciary duty of the members. Through an interview case study of the members in the AOA, the process and motivations of how institutional investors work with combining their fiduciary duty and ESG considerations are examined and described. There are four main findings to answer this question. 1) Transitioning for real-world impact through decarbonization and reallocation serve as a risk-managing tool with the ultimate aim of achieving a good long-term return. 2) Through United investor action, uncertainties on ESG methods and targets can be met through developing a common language, thereby mitigating ambiguities on ESG concerns. 3) Implicit and explicit ESG considerations enable a frictionless inclusion of ESG factors into the investment process, provided that this is not only based on an internal moral agenda. 4) It is the Fiduciary responsibility of investors to include ESG factors since this enables a long-term view and additional climate risk perspective on the financial outcome, and thereby expected by the beneficiaries to be included. Therefore, we suggest a reconceptualization of Fiduciary duty into the slightly different Fiduciary responsibility. Other institutional investors with ambitions of incorporating ESG factors can seek motivation and guidance in these findings to assess and manage their potential clashes beforehand.