29 January 2024

Fiduciary duties — the frontline of the faultline

A large part of the fate of the planet rests on this seemingly technical issue, writes Kieron Boyle

I started my career as a strategy consultant. I remember a lot of slides and a lot of two-by-two matrices. And if I had to find a topic that fits the "couldn't be more important for the world" and "sounds incredibly boring" box, I'd be hard-pressed to look beyond the issue of fiduciary duties.

Kieron BoyleFiduciary duties are the responsibility to manage someone else's money in their best interests. It's a fundamental concept that underwrites our financial system, but mention it to the average person on the street, and I'd wager that you'd get a blank look.

You'd get their interest, however, if you said that it's the rules that apply to every pension in the UK – some 15.9 million of them. Or that apply, in one form or other, to over $26 trillion of assets around the world – that's $10 a second for the next 82,000 years. And that the people managing this money are having to make tough choices between maximising financial returns now, and investing in a world that's worth retiring into.

Institutional investors are increasingly at the frontline of the faultline that runs through capital markets — namely, can the financial system address cascading issues of climate change and rising inequality, or will it accelerate them?

The common interpretation of the law around fiduciary duties still understands 'best interests' to be to maximise short-term financial returns. That makes it tricky to consider the wider, sometimes longer-term, risks of systemic issues like extreme weather events, environmental degradation, and mass migration. These carry huge financial implications too. And the people whose money this is, back to that person on the street, overwhelmingly want their investments to do good in the world.

So should we change those rules?

Well, like most things the majority of people don't have a view on, those that do, tend to hold it strongly.

A lot of incredibly thoughtful people would say "no". The rules are well understood. Beware of unintended consequences. It's for governments, not private capital, to solve public challenges. Markets will respond to incentives — if the risks of climate change and inequality are so great, investors will place money in the economic opportunities emerging from adaptation and transition.

But an increasing number would say "yes". The rules as interpreted are applying a 2-D model to a 3-D world. The risks of inaction are much greater than those of changing the status quo. Yes, it is for governments to regulate, but if your house is ablaze, you'd rather everybody pick up a bucket than wait patiently for the fire service. And while markets do respond to incentives, are these currently giving committed financial professionals the space they need to make serious decisions, with wide-ranging implications that affect us all?

The common interpretation of the law around fiduciary duties still understands 'best interests' to be to maximise short-term financial returns

You can probably tell I'm in the latter camp. And it's promising to see that the Financial Markets Law Committee, set up to provide guidance around issues of legal uncertainty affecting financial markets, is expected to be publishing guidance on pension trustees' fiduciary duty in relation to sustainability factors very soon.

However, perhaps the most important point is that there is a huge democratic deficit around the issue. It touches all of us but is near invisible to daily debate. You won't hear it at the top of the news and I'm yet to see the placards in the street.

But a large part of the fate of the planet rests on this seemingly technical issue. You'd think it should be getting much, much more attention.

Kieron Boyle is the CEO of the Impact Investing Institute, an independent non-profit set up to connect capital to impact. The Institute acts as a bridge between new economic ideas and mainstream capital markets. In November 2023, it published a guide on using catalytic capital for a global transition.

This is part of a series of monthly columns Boyle writes for Environmental Finance.

See the others here:

Kieron Boyle