Why an Updated Interpretation of the Fiduciary Standard Should Matter to the Carbon Markets.
Admittedly, discussions around fiduciary duty are apt to cause one’s eyes to glaze over. But the evolving interpretation of the definition of fiduciary duty has the potential to have lasting positive effects on carbon markets. At its most basic, fiduciary duty can be defined as acting in someone else’s best interest. How can fiduciary standards possibly matter to carbon? Because that duty serves as the foundation for board level investment decisions. If that foundation shifts toward acknowledging future climate risks, then carbon markets can benefit.
I get frustrated when I hear or read staff of family offices, foundations or endowments hide behind their fiduciary duty as an excuse not to invest in climate change opportunities (or as a justification to keep climate damaging investments in their portfolios). These folks appear to have narrowed their vision to focus only on seeking the highest total return, despite long-term implications for the planet. Fiduciary duty is broader than that.
But it wasn’t until I attended a webinar hosted by the Intentional Endowments Network last month that I understood how profound the implications could be as legal experts push fiduciary duty into the 21st century. In particular, the presentation by Professor Susan Gray of University of Oregon caught my attention. She argued institutions should take a fresh look at how they interpret fiduciary standards through the climate change lens. The rules have been around for a long time, but Prof. Gray argues their interpretation should be updated in light of climate change risks.
Broadly speaking, boards’ fiduciary responsibility encompasses a list of duties that includes obedience, loyalty, care and impartiality.
Duty of loyalty is defined as acting in the best interest of the beneficiary. This reference commonly refers to when a financial adviser must put his or her client’s needs ahead of their own. But best interest, in the case of institutions, is used as a way to assess financial returns, on a risk-adjusted investment basis. And this is where I get exasperated. Countless times I’ve heard the refrain “I can’t sacrifice return for climate impact.” But that argument falls flat. Multiple studies have shown that portfolios screening for climate change risk keep pace with, or outperform, traditional portfolios. Climate Trust’s pilot carbon offset fund is projected to return 14%. No return sacrificed there. Institutional investors should be looking at long term, intergenerational risks. How can they ignore climate risk in light of that responsibility? They shouldn’t. Assessing climate risk in an investment portfolio falls squarely within fiduciary duty.
When building a house, no one gets all that excited about the foundation. It’s cement and rebar and most of it’s in the ground. But we all know that if the foundation is compromised the building will not survive for generations. I look at fiduciary duty as a kind of foundation for climate change and carbon market investing. Once boards across the spectrum – pension funds, foundations, endowments, family offices – recognize that they are obliged to think about the very real, long-term risks associated with climate change, they may start to see carbon markets as an attractive opportunity.