Fiduciary Law and Responsible Investing

In Nature's trust

Benjamin J. Richardson

• Editore: Routledge
• Anno: 2013
• ISBN:
  9781135941130
• Edizione: 1
• Argomento: Law
• Categoria: Environmental Law

This book is about fiduciary law's influence on the financial economy's environmental performance, focusing on how the law affects responsible investing and considering possible legal reforms to shift financial markets closer towards sustainability. Fiduciary law governs how trustees, fund managers or other custodians administer the investment portfolios owned by beneficiaries. Written for a diverse audience, not just legal scholars, the book examines in a multi-jurisdictional context an array of philosophical, institutional and economic issues that have shaped the movement for responsible investing and its legal framework. Fiduciary law has acquired greater influence in the financial economy in tandem with the extraordinary recent growth of institutional funds such as pension plans and insurance company portfolios. While the fiduciary prejudice against responsible investing has somewhat waned in recent years, owing mainly to reinterpretations of fiduciary and trust law, significant barriers remain.

This book advances the notion of 'nature's trust' to metaphorically signal how fiduciary responsibility should accommodate society's dependence on long-term environmental well-being. Financial institutions, managing vast investment portfolios on behalf of millions of beneficiaries, should manage those investments with regard to the broader social interest in sustaining ecological health. Even for their own financial self-interest, investors over the long-term should benefit from maintaining nature's capital. We should expect everyone to act in nature's trust, from individual funds to market regulators. The ancient public trust doctrine could be refashioned for stimulating this change, and sovereign wealth funds should take the lead in pioneering best practices for environmentally responsible investing.

1

Responsible investing in an unsustainable world

Fiduciary finance for the wealth of the planet

This book is about the influence of fiduciary law on the financial economy and its environmental performance. It focuses on how fiduciary law affects responsible investing (RI) and investigates possible reforms that might shift financial markets closer to sustainability – or ‘environmentally sustainable development’. Alongside the recent growth of institutional investment, fiduciary law has assumed an ever-increasing role in the financial economy. Pension plans, insurance companies and other institutional investors that manage portfolios on behalf of millions of beneficiaries have fiduciary or fiduciary-like obligations.

In a world beset by the intertwined crises afflicting financial markets and the planetary environment, reforming fiduciary finance law in order to promote RI has never been more urgent. The global financial crisis (GFC) that erupted in 2008 revealed both profound weaknesses in the conventional paradigm of market finance and a need to rethink its fundamental tenets and purpose. Another emerging crisis stems from the rapid degradation of life-sustaining natural resources, which threatens the livelihoods and prosperity of not just future generations but also those living today. Climate change looms as the most ominous such threat. While finance capitalism has been extensively excoriated for being a vector of economic crisis,¹ its contribution to environmental unsustainability is less acknowledged.² Both the GFC and environmental crises stem from similar fundamental dysfunctions of the market economy – it lacks an innate mechanism to manage systemic risks, and it fails to take into account very long-term considerations such as global warming.

Responsible investment is a beguilingly simple yet conceptually elusive term, definable in a myriad of ways. I use it in two senses: descriptively, to refer to various forms of investing and financing that purport to take into account social, environmental and other non-financial criteria; and normatively, about what RI ought to be. The lack of any authoritative, universal agreement on RI partly reflects diverse ethical positions investors have in a socially heterogeneous world, as well as the diverse reasons that motivate people even when they share the same investment goal. For example, two investors might take the same action (e.g., to divest from a company that exploits sweatshop labour), but one might act because she believes that sweat-shops are unethical, and the other because he believes that sweatshops pose a reputational risk to the company’s financial prospects. Thus, although this book often refers to the RI ‘movement’ or ‘sector’, we should appreciate that its practitioners are heterogeneous, and many might not even regard themselves as RI adherents but rather as savvy investors who scrutinize social and environmental issues purely for financial prudence.

Methodologically, it is even more difficult to forge a normative position about what RI should be. However, at least in regard to very serious environmental activities or impacts, such as climate change, some parameters on which investments qualify as RI can be defined. Responsible investing should be attentive to long-term environmental issues that underpin a sustainable investing portfolio. Furthermore, in the absence of agreement on other seemingly less fundamental RI issues, investment procedures can provide a focal point around which more transparent, informed and democratic ethical deliberation about our investment decisions can occur.

Fiduciary law is a crucial element of this task. This book takes an expansive view of ‘fiduciary finance law’, whereby it encompasses not only conventional legal doctrine about fiduciary responsibility as pioneered by the English courts of equity but also a range of quasi-fiduciary relationships and standards found in statutory regulation, codes of conduct and other sources. While the fiduciary prejudice against RI has waned in recent years, owing mainly to reinterpretations of the law, significant barriers remain. This book advances the notion of ‘nature’s trust’ metaphorically to signal how fiduciary responsibility should accommodate society’s dependence on long-term environmental well-being. Financial institutions, as managers of vast assets for millions of people, and with the capacity for significant environmental repercussions from the businesses and projects they invest in, should have public-like responsibilities to manage those investments with regard to the social interest in sustaining ecological integrity. Even for their own financial self-interest, investors over the long term should benefit by not depleting natural capital. Acting in nature’s trust should apply not only to individual funds but also to those who regulate the market. As the ultimate managers of nature’s trust, government regulators must help increase or at least preserve the value of that trust. The ancient public trust doctrine could be refashioned for this task, coupled with changes to the governance of financial institutions to promote more environmentally reflective and compassionate decision-making.

Behind these proposals is the goal of ‘sustainability’. This concept essentially means passing on to future generations undiminished environmental/natural capital such as clean water, predictable climate, an intact ozone layer, productive soils and ample biodiversity. Prevailing modes of capital investment tend to assume that natural and non-natural capital are interchangeable substitutes. Depletion of non-renewable natural resources such as oil and gas is assumed to be worthwhile, as their economic development converts natural resources into new forms of human capital to improve living standards for the benefit of present and future generations. The plausibility of this model is not readily extendable to multi-functional ecological services such as the nutrient cycle and the hydrologic cycle – irreplaceable complex services of enormous economic benefit.

All investing should safeguard non-substitutable natural capital by boosting funding for resource efficiency, clean and low-carbon technologies, climate adaptation, ecosystem improvement and other ways to build sustainability.³ By prioritizing such goals, RI can help internalize the social and environmental costs of the economy so that it develops only within biosphere limits. RI implies that investors value more than mere financial returns, as they are not only investors but also customers, workers and citizens, and ‘in those other roles they might be hurt by social and environmental harm caused by their investments’.⁴ In these other guises, RI can serve as a crucial mechanism in the sustainability chain to link shareholders, lenders and other financiers with the global corporate sector, providing a way to reduce the agency problems of financial markets that have divorced investors from the operators of business, and thus control over their environmental and social sequelae.

Presently, RI has a long way to go before it might fulfill this vision. It has captured only a small niche in the financial economy and is rebuffed by many detractors, who fear it politicizes investment decisions or sacrifices financial returns.⁵ Many social investors were also complicit in the GFC through their failure to pay attention to issues of financial stability and systemic risk.⁶ The minority of mainstream financiers who have embraced RI have tended to recast it into a new paradigm of financial analysis of ‘environmental, social and governance (ESG)’ criteria.⁷ But even this more sanitized version of RI, ostensibly devoid of ethical connotations, has struggled to woo converts, partly because of impediments in organizational cultures and difficulties in financially quantifying the business value of improved environmental performance.

A further reason for concern is that much investment masquerading as ‘socially responsible’ has not been conducted with moral rigour. While many investors and business leaders today distance themselves from the hyperbole of Milton Friedman, who once admonished corporate social responsibility (CSR) as one of the ‘[f]ew trends [that] could so thoroughly undermine the very foundations of our free society’,⁸ most are unwilling to sacrifice profits for environmental gains. Rather than ask how investment might contribute to sustainability, today’s social investors are more likely to ask self-servingly how sustainability contributes to their investment returns. There is nothing objectionable about people financially benefitting from ethical investment choices; the problem arises when the financial rationale becomes their only rationale for acting.

The RI movement has tended to assume that over the long term, the financial and extra-financial values of investors will coincide.⁹ While environmental protection in the long run may coincide with the financial self-interest of investors, there are too many uncertainties to reliably predict financial returns over a protracted period. Such uncertainty means that long-term considerations tend to get ‘discounted’. Concomitantly, financiers face many counter-vailing pressures to act for the short term, in which the immediate economic benefits of depleting natural capital outweigh any long-term costs for which investors are not typically accountable under fiduciary law or other standards. Catalysts for such behaviour include ‘misaligned incentives, unsustainable leverage, mis-pricing of risk, complexity, and the “quickening” of access to information and reporting requirements/regulations’.¹⁰

The fixation on a myopic, single-value view of commerce and investment may thus marginalize RI strategies that do not dovetail with market conventions. The older traditions of ‘ethical investment’ pioneered by faith-based investors have largely ceded to a business case approach. Its proponents obsess over the financial credentials of RI, sponsoring an endless stream of research about its supposed financial advantage.¹¹ The core belief is that companies’ ability to manage ESG-related risks and opportunities is increasingly relevant to business competitiveness, profitability and organizational competence.¹² Thus, socially-aware investors who use an ESG ‘overlay’ may reap added returns. Missing from this perspective is acceptance of an ethical responsibility to act regardless of immediate financial returns. Dominant industry standards, such as the United Nations Principles for Responsible Investment (UNPRI), lack explicit sustainability performance standards, instead nimbly implying that ethical and financial goals will merge through a long-term perspective on investing. If fund managers and trustees rely only on instrumental grounds to act ethically, by their own reasoning they would be justified in making an exception if ignoring those ‘extraneous’ values would be more profitable. Any commitment to RI thus remains fragile.

Unsustainable investment practices are also attributable to failures of the legal system. Fiduciary finance law has a problematic tendency to view financial institutions as just ordinary private trusts, despite their often public-like characteristics and social impacts. Under prevailing legal understandings, fund managers normally can accommodate sustainability considerations only if they provide investment benefits, if investors consent or if the lega...

Indice dei contenuti

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Acknowledgements
• Abbreviations
• 1. Responsible investing in an unsustainable world
• 2. The influence of responsible investment
• 3. Fiduciary finance law
• 4. Fiduciary law in retail and institutional finance
• 5. Sovereign wealth funds
• 6. The public fiduciary: in nature’s trust
• Index