Can investors save the planet? - NZAMI and Fiduciary Duty
Asset manager signatories of the Net Zero Asset Manager Initiative, part of the Glasgow Financial Alliance for Net Zero (‘GFANZ’), have committed to investing in line with the Race to Zero goal of limiting global warming to 1.5C with limited or no overshoot. There is now only a remote possibility of limiting global warming to 1.5C with limited or no overshoot, with warming of 2C or more now much more likely. The economic differences between the scenarios are not small. As a simple example, a 2C pathway allows an estimated 2/3rds greater consumption of oil and gas before hitting net zero than is the case under 1.5C. As a result, many industries, including energy, industrial processes, construction, and food, will require much more dramatic change in the more ambitious scenario. How, then, can an investment strategy targeted at the former scenario also be optimal for the latter?
In our article we dig into the considerations of fiduciary duty a little more deeply, looking at how the duties of investors and corporate boards interact when addressing the issue of climate change. The considerations vary depending on what type of financial activity is being considered. To bound the discussion, we focus here on asset managers. These have their own GFANZ-affiliated subgroup: the Net Zero Asset Managers Initiative (‘NZAMI’) with its own set of commitments specific to that industry. We consider both fiduciary duty in the strict sense and the duty of care that arises in the investment context and we distinguish the legal standard from the ‘expected standard’ that is informed by client and market expectations as well as the degree of legal risk.
Given that a recent report from the United Nations Environment Programme says that there is ‘no credible pathway’ in place to 1.5C, we explore the implications for asset managers, as fiduciaries, of investing in line with a climate scenario that might now be considered an unlikely future outcome. We explore the arguments relating to fiduciary duty by reference to particular investment strategies that could be considered to be ‘aligned with 1.5C’. We take as a starting point the fact that investors cannot through their actions inevitably force the world onto a 1.5C path. To a significant degree investors will have to take the scenario they get rather than defining it themselves, and investment risk needs to be seen in that context. On the other hand, NZAMI commitments imply that investment activity can have at least some impact on real-world outcomes. So that is also important when considering whether asset managers are meeting their obligations to clients.
We assess common ‘net zero aligned’ investment strategies such as portfolio decarbonisation, tilting, active ownership, ESG integration, and impact investing by reference to considerations of fiduciary duty and real-world efficacy at combatting climate change. We find that the more likely a strategy is to deliver real-world change in carbon emissions in line with the 1.5C goal, the more likely it is to give rise to fiduciary concerns. Although these fiduciary concerns are unlikely in most cases to give rise to enforceable legal liability, it is likely that many asset managers, when applying an expected standard of fiduciary duty, will conclude that such strategies are not consistent with that duty in the absence of an explicit authorising mandate from clients. As a result, the strategies most likely to be adopted are also the least likely to contribute meaningfully to addressing climate change.
We set out ways in which the commitments could be reframed so as to maximise real world impact of the initiative in the fight against climate change, while avoiding conflicts with the fiduciary duties of signatories. Key to this is aligning commitments to a more realistic climate scenario than 1.5C with limited or no overshoot.
Tom Gosling is an Executive Fellow of Finance at London Business School.
Iain MacNeil is the Alexander Stone Chair of Commercial Law at University of Glasgow.
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