3 Fiduciary duty and climate risk

The reasoning behind developing this paper was that momentum that had once been building in the fiduciary sector towards wide-scale adoption of the principles of 21st Century Fiduciary Duty had tapered off. This despite or maybe even because of the tsunami of ESG marketing in recent years. There is so much flotsam and jetsam in the field of sustainable finance that practitioners could be excused for avoiding the issue altogether. Particularly, in mid 2022 when investors' attention is drawn to more traditional economic issues such as rampant inflation and probable global recession following supply and demand shocks in the aftermath of pandemic and war. In our view this would be a shame. The threat of climate change has not abated. Achieving the global development goals set out by the UN in 2016 is still a faraway event. And global regulators will continue to incorporate the green and sustainable finance agenda into new rules and regulations. Our objective with this paper was to create and establish a clear framework to provide guidance to fiduciary professionals in the Channel Islands. A framework simple enough to provide clarity, robust enough to provide confidence and practical enough to be useful. In short, a framework that enables practitioners to cut through the current white noise and follow a roadmap to ensure their working practices, process and procedures aligned with the modern concept of fiduciary duty. We strongly believe the three-step approach set out in this paper does just that. This framework is not the complete article. We believe it is upon practitioners and their representative groups to build upon the foundation presented here, putting meat on the bones as it were in a more granular fashion. But it is a framework that ensures consideration of the purpose of the capital under stewardship is front and centre. It is a framework that ensures consideration of ESG factors in the investment process is taken into account. And it is a framework that ensures that global climate change metrics are produced and provided to ensure its impact on asset prices is assessed. In our view completing these three undertakings will enable fiduciaries to follow a modern 21st century approach to fiduciary duty in tandem with their traditional core duty to preserve and enhance capital. The two are not mutually exclusive. Indeed, quite the opposite, they are symbiotic. Beringa Consulting, Private Finance and Its Role in Supporting the Transition to Net Zero, (2022)

Employee Retirement Income Security Act (ERISA), US Department of Labor, (2021)

England and Wales High Court (Chancery Division), Decisions, Butler-Sloss v The Charity Commission: the pursuit of charitable purposes through ESG investing, (2022)

Global Reporting Initiative, Reporting Standards (2022)

Guernsey Financial Services Commission, Code of Corporate Governance, (Updated 2021)

Guernsey Finance, Fiduciary Duty in the 21st Century. Understanding Guernsey's Position, (2021)

Jersey Finance, Trustee Responsibilities and ESG: Identifying Opportunities, Mitigating Risk and Finding Consensus, (2022)

International Panel on Climate Change, Working Group III, Sixth Round Assessment, (2022)

International Sustainability Institute of the Channel Islands, TCFD and Private Capital. What relevance public disclosure rules to private capital?' , (2022)

Network for Greening the Financial System, First Comprehensive Report, (2021)

OECD, ESG Investing. Practices, Progress and Challenges, (2020)

Partnership for Carbon Accounting Financials, The Global GHG Standard, (2020)

Task Force on Climate Related Financial Disclosures, Final Report, (2017)

The Economist, ESG should be boiled down to one simple measure: emissions. (July, 2022)

United Nations PRI, Fidiuciary Duty in the 21st Century, (2015)

A - No-one should or canforce anythingon a client. Theframework sets out guidancefor those who want tobe able tofollow a sustainable path. It provides a'frame' fordiscussion and engagement and shouldhelp bringbeneficiaryandfiduciary closerin understanding. Q - DoI riskbeing suedbybeneficiariesfor foistinganinvestment philosophyon them? A - It's unlikely that specific ESG regulations exist in an offshore world. Climate risk considerations perhaps. But supervisors should be reassured by such active oversight. Q - How does this all sit with my regulatory duties? A- Climate metrics are one ofthe very fewquantitative measures thatglobalpolicy makers agree on. Financedemissions and future temperature alignmentprovide simple, easy to understandmeasures of climate risktoportfolios. Pricing of assets willincorporate climate riskand discounting ofassets withhigher exposures to climate riskwillincrease in time. Q - Producing TCFDmetrics sounds costly. Is it reallynecessary? A - Investment powers, procedures, governance, and instructions should be aligned with trust documentation, letter of wishes etc. Setting of investment objectives and performance management in line with purpose is necessary. Q - The trust has a purpose. What does that mean for investment objectives?

Climate assessment ESG integration Setting a purpose

A- Itcan. The fiduciarydutyistoensureitis done. Veryfewmanagersyet havethecapabilityandprovide suchreportingasamatterof course. Thirdpartyprovidershave focussedonlistedsecuritiesto datebutnodoubtnewtools willappearintime. Q- Isn'tclimatereporting anexercisethatcanbedone bytheinvestmentmanager.

A - Theframeworkdoesn't requirefiduciaries tobeinvestment experts, merelysufficiently knowledgeable to effectivelycommunicate investment objectives of the client to the investment manager. And then to ensure effective reportingand performance management. A situation that should be nodifferentin practice to the current general case.

Q - HowdoI review the investment objectives of myclient?

Q - There are nounderlying sustainabilityobjectives of the trust.Now what? A - The frameworkprovides a 'frame' for engagement. Discussion could catalyse a revisionof investment objectives and arequirement to revisit trustdocumentation.