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Consistency of the steps with 21 21st Century Fiduciary Duty
8 Consistency of the steps with 21st Century
Fiduciary Duty
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We set out three sequential steps for fiduciaries to consider in excising their duties in line with the 21st century concept. The choice of the label step is quite deliberate. We believe the process of incorporation of the modern concept is not a binary transition. Each step can be taken independently of the other and each can be seen to build upon the last as the premise for each becomes a little more impalpable. Time can be taken to embed and digest the implications of each before consideration of moving on to the next. In that respect each can be thought of as moving up a level. That is each step can be seen as a separate leg of a journey with an allowance for pause and rest after each.
Conceptually climate risk is the easiest to understand. As set out in section four the transmission mechanism of climate risk to impact on asset prices is a straightforward concept. The notion that fiduciaries ought at least to make beneficiaries aware of such risks is not a difficult sell.
Exactly what and how is a matter of discussion. The ISICI has previously set out its view that a set of simple metrics relating to carbon emissions intensity together with the temperature alignment of assets and portfolios is all that is necessary to provide a sufficient level of intuition and understanding of the climate characteristics of a portfolio. From this base level of information an informed discussion can then be had with experts on likely future impact on prices and rebalancing of portfolios. We believe that this step is pretty incontrovertible, and trustees should be seeking as a matter of urgency to provide the climate assessments as we outline.
In a similar vein, step two, the case that ESG risks can and will have some impact on asset pricing is in our view not contentious. That the Trump administration insisted on such risks as needing to have pecuniary impact to qualify for inclusion for consideration only served to clarify the point in our opinion. Cause and effect is not as straightforward as in the case of climate, there is no one simple metric such as carbon emissions to be able to report. The relevant action for the fiduciary here is to ensure that the risk management process of the investment management process takes ESG factors into account. Not to rely on them solely. But logic suggests that a broader assessment of risk is common sense.
Finally, step three, a consideration of purpose over and above that of preservation of capital. Step three moves the conversation on to having capital that in addition to making private financial returns is also deployed to serve the interests of others.
We are now clearly in the realms of the role of trusted advisor. Fiduciary duty in this context encompasses such matters as ensuring that structures, governance, objectives and documentation are properly aligned with aims and preferences.
The graphic sets out a short summary of how each of these three steps qualifies in the traditional sense of fiduciary duty. Each of these steps can be viewed as separate and stand alone. Combined, we believe they provide for a comprehensive check list for meeting the 21st century sense of fiduciary duty.
ESG integration
Climate ASSESSMENT
Does the risk management process of the investment process consider ESG factors that have pecuniary impact?
Is the calculation of climaterelated metrics taking place and being regularly assessed?
Investment PURPOSE
Are there specific investment goals of the trust that relate to sustainability objectives?
The impact of climate change on asset prices is recognised as so signficant as to create financial stability issues. Calculation of metrics forming global disclosure requirements for private assets is common sense.
Procedures should be reviewed and processes established to ensure the regular calcuation of such climate metrics to ensure the sustainability of the assets can be periodically assessed.
The fiduciary duty remains in law to preserve and enchance the value of the trust property. Ensuring that the potential impact of climate risk on the future price of assets is readily assessed and understood is a basic component of this duty. A broad consideration of risks during the investment process is a reasonable expectation. This includes consideration of ESG type factors that may have long term impact on returns.
Investment policies and instructions to investment managers should be reviewed to ensure that consideration of significant ESG risks is part and parcel of the asset selection process.
The fiduciary duty remains in law to preserve and enchance the value of the trust property. Ensuring that due consideration of ESG factors and their impact on return takes place is consistent with this duty. To be clear this is not to prescribe investment in particular 'ESG assets' .
A trust may be established with a specific investment objective or policy in mind, eg achieving social development goals or alignment with IPCC targets, set out within trust deeds.
Trust deeds should be written to clarify such goals. Governance and policies should be reviewed to ensure alignment with the prescribed role for capital and ensure the investment manager is properly directed.
The fiduciary duty remains in law to preserve and enchance the value of the trust property. But this is conditioned by any over-riding objectives set out in the trust deed, that is these would set a constrained choice for investment. UK case law has demonstrated this precedent in the charitable trust case.
