Debate around fiduciary duty moves on

Fiduciary duty shouldn’t be a barrier to investing according to ESG principles, said Marcel Barros, executive director of Latin America’s largest pension fund, the Banco do Brasil SA, or PREVI, talking at PRI in Person 2015, the annual conference for the UN-supported international network of investors working to put Principles for Responsible Investment into practice.

“People need a planet to live in; where is the profit if I can’t breathe or produce enough food? We need to respect the law; take care of our workers; convince people ESG is important,” he argued in an impassioned call for greater ESG vigilance among investors.

The argument that fiduciary duty is at odds with the adoption of ESG principles – since trustees primary concern should be on a fund’s financials rather than “non-financial” considerations – has raged for a decade.

The PRI certainly hopes that its latest publication, Fiduciary Duty in the 21^st Century, will finally show that fiduciary duty can no longer be used as a barrier to implementing ESG principles.

The global report, drawn from extensive outreach and interviews, finds that ESG issues are in fact integral to financial performance.

“We’ve found that failing to consider longer term drivers like ESG in investment practices is actually a failure of fiduciary duty,” argues Fiona Reynolds, managing director, PRI. Examples of this in the report abound. Like a reference to investors that avoid a high-carbon asset because of financial concerns about stranded assets, are infact likely to be seen as consistent with fiduciary duties.

But despite the latest swathe of research, many fiduciaries are still dragging their feet when it comes to implementing ESG in many jurisdictions. It’s why the report is underscored with calls for change. Like the need for better regulation and more policy initiatives to support ESG.

Brazilian laws certainly need to become “much more effective to support ESG,” argues Barros. Experiences in Latin America however are in sharp contrast to The Netherlands where fiduciary acceptance of ESG has led to laws like a 2013 initiative that now requires pension funds say how they are integrating ESG with their investment decisions.

In Japan, new codes of practice should see more institutional investors monitoring the corporations they invest in for ESG, but progress is still slow in comparison.

“As a regulator we will be carefully watching for implementation of these two codes,” assures Amane Fujimoto, deputy director, in Japan’s Financial Services Agency, a fellow panellist.

The battle is ongoing in the US where perceptions about fiduciary duty and responsible investment, with lawyers and consultants too often characterising ESG issues as non-financial factors remain.

Part of the solution could be changing the language around ESG, suggests Robert Eccles, Professor of Management Practice, Harvard Business School, chairman, Arabesque Asset Management.

“If you talk about ESG integration and responsible investment the connotation is that you are giving up returns. You need to reframe it. You talk about sustainability people’s eyes glaze over. The issue is around language.”

Despite the challenges of coordinating global progress, Reynolds insists the argument as to whether fiduciary duties can incorporate ESG factors is paid less lip service than before. “The report will move the debate on,” she says.