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ESG and 21st century fiduciary duty

ESG and 21st century fiduciary duty

27 February, 2023

Two myths seem to circulate more than any others when it comes to the intersection of environmental, social and governance (ESG) factors and wealth management. The first is that considering ESG in any way automatically means lower return on investments, the second is that ESG is not part of fiduciary duty.

To deal with the first of those, there is now sufficient evidence to say that investing in funds or assets with a sustainability or environmental mandate does not necessarily result in lower financial returns.

Conditions improving for sustainable investing

Morningstar has reported that, between 2017 and 2021, 88 of its 110 ESG indexes with five-year histories outperformed their non-ESG equivalents. The S&P 500 ESG gained 32 percent in 2021, bettering the 27 percent gain recorded by the S&P 500.

Looking forward – and notwithstanding the high-inflation, low-growth environment the economy is now in – the investment winds are blowing in favour of more sustainable investing.

As society evolves and attitudes and habits shift, some of the previously attractive companies and industries will become inherently less appealing to investors anyway – things like tobacco or petrol use are decreasing as smoking rates reduce and electric vehicle (EV) ownership rises.

Consumer demand is a further factor that will lead to an even greater focus on ESG. A survey conducted by Savanta and the FT revealed that around 60 percent of UK millionaires regard providing ESG investing options as moderately, very or extremely important.

Fund managers themselves are also driving change; Larry Fink of Blackrock is notably vocal on the issue, and his firm’s approach to ESG integration states: “Our investment conviction is that ESG-integrated portfolios can provide better risk-adjusted returns to investors over the long-term, and that ESG-related data provides an increasingly important set of tools to identify unpriced risks and opportunities within portfolios.”

Dr Andy Sloan, founder of the International Sustainability Institute Channel Islands

Dr Andy Sloan, founder of the International Sustainability Institute Channel Islands

A 21st-century fiduciary duty

‘Risks and opportunities’ are salient points as we move on to consider that second myth: that ESG is not part of fiduciary duty.

Let’s state unequivocally that a good fiduciary considers any and all risks to their clients’ assets, and climate change and ESG are compatible with that existing duty.

So what are the barriers to ESG being regarded in the same bracket as safeguarding assets and acting in the best interests of the settlor?

One will be the sheer variety of metrics, reports and recommendations that fiduciaries are bombarded with, and the lack of a universal standard and measure.

2022 saw a genuine debate about the benefits of many of the ESG approaches. Serious and credible commentators have queried the practicalities of many of the prescribed approaches.

This all feeds the debate as to whether any of this is consistent with the common law expectation of fiduciary duty.

But the weight of popular opinion is certainly shifting towards incorporating ESG factors into contemporary duty. Al Gore, introducing the UN’s ‘Fiduciary Duty in the 21st Century Programme’ said: “… as with any other issue related to the prudent management of capital, considering sustainability is not only important to upholding fiduciary duty, it is obligatory.”

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Michael Betley, Global Head of Private Client at Ocorian

A framework to light the way

If the path towards integrating ESG factors into fiduciary duty needs to be walked, and we suggest that it does, then those who undertake the journey could do with some practical help.

That is why we have developed a framework to help practitioners do just this.

ISICI’s three-step framework provides a practical guide for how fiduciary practitioners should align with the concept of 21st century fiduciary duty, and ensure assets under their stewardship are invested according to sustainability principles.

This article first appeared on eprivateclient on 17 February, 2023.