Fiduciaries Can Save the Earth

Earth Day is as good occasion as any to celebrate the many positive influences sustainable investing has had on mainstream investing practices. Sustainable investing addresses the flawed assumption of traditional investment models that financial capital can be deployed endlessly without reference to the limits of the earth’s regenerative capacities. Sustainable investing is consequently creating profound shifts in the way we think about “wealth,” forcing us to question our obsession with short-term results, and stimulating research into new metrics for defining and measuring the value of our investments. But perhaps the most far-reaching impacts on the real world of investing will be felt as the principles of sustainable investing cause fiduciaries to radically rethink their responsibilities to those whose assets they hold in trust.

Fiduciaries have traditionally taken a narrow view of their charge to maximize shareholder value. But the devil has always been in the details of that mandate—what exactly does it mean to maximize shareholder value? In a world in which institutional investors have a majority stake in virtually all the world’s corporate assets, can shareholder interests truly be separated from the interests of other global stakeholders? Over what time period are we attempting to maximize value? 

In a thoughtful essay entitled “Fiduciary Duty,” published in the book Sustainable Investing: The Art of Long Term Performance (Earthscan, 2008), Stephen Viederman argues that fiduciaries, whose charge it is to guard the value of their beneficiaries’ wealth, may in fact be construed under emerging interpretations of the law to have an obligation to take sustainability factors into account in their asset allocation decision making. He bases this argument on the growing body of evidence that society’s failure to respond to climate change (represented by the sum total of its investment decision making) is about to cause global economic damage of almost unimaginable proportions. (The Stern Review on the Economics of Climate Change attempts to quantify this.) Viederman, the former president of the Jessie Smith Noyes Foundation, who now serves as an advisor on shareholder advocacy issues for a number of foundations, argues that “the need to mitigate and adapt to the effects of climate change is likely to be the defining issue of the 21st century and must be approached urgently and seriously.” He calls on fiduciaries to reframe their sense of duty to maximize shareholder returns in a broader societal and environmental context: “What good is a maximum rate of return on an investment,” he asks, “if it fouls the air, poisons the water, degrades the land, changes the climate and contributes to greater inequalities among people?”

No less august a body than the Securities and Exchange Commission appears to be taking a similar view as of late. In a Commission Guidance Regarding Disclosure Related to Climate Change issued in January, the SEC clearly implied that the environmental impacts of business as usual, even those that have not yet hit a corporation’s profit and loss statement, can translate into very material risks. In its guidance document, the SEC ruled that companies should consider disclosing the risks to their business, not only of existing, but of pending climate change regulations, laws, and international treaties. Even more significantly, it opines that a company should consider disclosing the potential indirect impacts that climate-change-related developments will have on the future market for its goods and services.

This guidance exerts real regulatory pressure, not only on companies to disclose more about the environmental impacts of the way they do business, but also on fiduciaries to demand that companies make those disclosures. The collective impact of fiduciaries pressing for such disclosures will be huge. According to the Conference Board, institutional investors—including pension funds, investment companies, insurance companies, banks, and foundations—now hold more than 75% of public equity in the largest US corporations, up from 47% in 1987. More and more, these institutional investors are demanding that the companies in which they hold equity positions account for the environmental and social costs of their operations and anticipate the impacts on future bottom lines. Signatories to the United Nation’s Principals for Responsible Investing, representing more than 570 asset owners and advisors who control more than $18 trillion in assets, have pledged to report on how they are incorporating environmental, social, and governance factors into their investment decisions and are consequently turning up the heat on corporate environmental accountability.

As fiduciaries step up to the plate and take responsibility for the sustainability of their asset allocation decisions, a long-overdue tectonic shift is occurring in the investment landscape. Indeed, fiduciaries can save the earth and can do so by counting our beleaguered planet among their stakeholders. As Viederman argues so convincingly in his essay, the resolution of “the conflict between routine investment practices and the planet’s social and environmental realities” is largely in their hands.

–Susan Arterian Chang writes on sustainable investing and the new economy and recently launched a new website, the Impact Investor.

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