Fiduciary duty is not the obstacle to incorporating ESG issues into investment processes that it is commonly assumed to be, although fiduciary duty is often presented as an excuse for not taking action.

Many of the asset owners interviewed for this research have taken a proactive approach to responsible investment or ESG integration. The consistent message, across all eight of the countries, was that fiduciary duty is not an obstacle to action. Most described fiduciary duty as a requirement that informs investment and management practice in a similar manner to aspects such as costs and investment returns. Some went further arguing that fiduciary duty creates a positive duty on them to take ESG issues into account in their investment practices, suggesting that a failure to take account of ESG issues could be seen as a breach of their fiduciary duties.

However, the interviewees commented that asset owners and advisers often point to fiduciary duty as the reason why they cannot integrate ESG issues into their investment processes or engage with companies on these issues. This argument is often underpinned by the assumption that a focus on ESG issues requires a trade-off in investment performance. This is particularly important in the US, where interviewees pointed to the common belief that investors can only pursue corporate governance or non-financial issues if it can be clearly demonstrated that these activities do not harm the value of investment assets.

Legally, fiduciary duty is a process test

There was consensus among all of the lawyers interviewed, across all the jurisdictions, that when evaluating whether or not an institution has delivered on its fiduciary duties, courts will distinguish between the decision-making process and the resulting decision. The law is reluctant to test fiduciaries against the perfect wisdom of hindsight, or second-guess judgments that inherently involve a balance of commercial risks, providing that the fiduciaries can demonstrate that they applied an appropriate degree of diligence in their good-faith pursuit of beneficiaries’ interests.

Investors are encouraged to take a proactive, long-term approach on ESG issues

Though regulatory authorities generally do not take a view on whether or not asset owners should invest in particular sectors or activities, they do expect asset owners to be aware of and to manage ESG risks, and to pay close attention to decisions that lead to skews in portfolios. Regulatory authorities will tend to look closely at investment decisions that expose funds to particular risks (e.g. a high-carbon portfolio or a portfolio with a weighting to renewable energy) and will expect them to explicitly assess the implications for the overall risk profile of the fund.

This suggests that asset owners may take account of wider ESG issues, so long as there is a clear focus on beneficiaries’ interests. In that context, for example, a decision not to invest in coal mines (e.g. because of concerns about these assets being stranded as a result of climate change policy) is likely to be seen as consistent with fiduciary duties so long as this decision is based on credible assumptions and a robust decision-making process. This requires trustees to have the discipline to set out their investment beliefs, to be prepared to review the investment outcomes achieved and to have the willingness to change if the data changes or if it is clear that the decision is causing significant damage to the beneficiaries’ financial interests.

Interviewees generally saw this wide discretion as being positive for ESG integration, but some cautioned that this discretion may make it difficult for beneficiaries to hold trustees to account. One interviewee cited climate change as an example, noting that beneficiaries would find it very difficult to challenge trustees’ decision not to take climate change into account if the trustees had reviewed the evidence, taken advice from their investment consultant and deemed there to be no associated risk to the portfolio.

Example: Climate change

Fiduciaries need to be able to show that they have identified and assessed the risks (to companies and to their portfolios). In the case of climate change, for example, this would require them to:

  • show that they have recognised relevant risks (even if they are sceptics on the issue of climate change);
  • analyse how climate change might affect investment returns over the short, medium and long-term;
  • explicitly manage the risks, and not assume that the risks are automatically managed by other risk management strategies;
  • interrogate and challenge the individuals or organisations (e.g. investment managers, companies) to ensure that these risks are being effectively managed;
  • establish processes that enable them to demonstrate the actions they have taken.

Benficiaries, trustees and consultants

Beneficiaries are a missing link and likely to remain so

The interests of beneficiaries are central to definitions of fiduciary duty. Traditionally, beneficiaries’ best interests have been narrowly defined as financial interests, which investors would therefore often be well-placed to make their own judgements on without consulting beneficiaries. Recent policy discussions, however, (e.g. the UK discussions stimulated by the Kay Review since 2012) have argued that fiduciaries should take account of their beneficiaries’ views as to what constitutes their best interests.

The merits of this argument were acknowledged by interviewees, but they pointed to three major barriers to change:

  • Most beneficiaries have limited understanding of or interest in how their pensions are being invested so long as the pension promise is being met.
  • Beneficiaries are unlikely to agree on how their pension fund should address ESG issues.
  • It is difficult to engage meaningfully with beneficiaries, in particular for large funds, which can have tens of thousands of beneficiaries.

Some interviewees offered challenges to these assumptions:

  • Pension fund trustees engage successfully with beneficiaries on a variety of other, often highly complex, issues relating to their retirement benefits.
  • The purpose of canvassing beneficiaries’ views is not to reach consensus on a fund’s approach to a specific ethical issue, but to understand the importance assigned to ESG issues.
  • Canvassing beneficiaries’ views could, or even should, form part of trustees’ own due diligence processes for understanding what ESG issues are likely to gain traction and be of investment significance.

Some interviewees said that not engaging with beneficiaries is the preferred approach precisely because it reduces the likelihood that beneficiaries will pressure trustees to take action on ESG issues.

Trustees are likely to face much more scrutiny

Trustee capacity, competence and professionalism were identified as particularly important for responsible investment, and even more so in markets where responsible investment is relatively new or underdeveloped. Interviewees said that the asset owners that are most proactive and progressive on responsible investment tend to be those where the trustees have detailed knowledge and expertise of ESG issues.

Interviewees suggested that fiduciary duty requires trustees to be able to show that they have identified the relevant risks to their investments(including those arising from ESG issues), that they have put appropriate strategies in place to manage these risks and that they have overseen and monitored the actions of those charged with managing these risks (e.g. investment managers and companies).

Legal advisers and investment consultants’ interpretation of fiduciary duty play a critical role

Obtaining advice from investment consultants is a legal requirement in many countries, and many jurisdictions allow asset owners to use the fact that they followed the advice given by investment consultants as a defence in court.

A recurring theme in the interviews was that the advice being given by these consultants and advisers – in particular in the US – is often based on a very narrow interpretation of fiduciary duty. Interviewees commented that most lawyers and consultants tend to advise their clients that the law requires them to have exclusive focus on financial returns, often in the erroneous belief that taking account of ESG issues will have a negative impact on investment returns. One interviewee noted: “they find it easier to say ‘no’ when asked about these issues”.

Impact of the defined contribution trend

New fiduciaries may emerge from defined contribution schemes

In many countries, the move from defined benefit to defined contribution pension schemes raises questions about the continued relevance of fiduciary duty concepts. In some cases, fiduciary duties continue to apply: for example, in South Africa, funds continue to be liable for outsourced activities, so they need to ensure that appropriate contracts are in place and that the fund has a right of recourse against the service provider. In other markets, the nature of the duty to beneficiaries of insurance companies, investment managers and sponsoring organisations in contractbased schemes (i.e. where the pension provider does not have fiduciary or equivalent obligations to the beneficiary in the way that a trustee would in a trust-based scheme) is not yet fully defined.

A number of interviewees expressed concern that while contract law protections would provide certain protections for beneficiaries, it might not deliver equivalent protection to fiduciary duty.


When we look at ESG issues, and at how fiduciary investors might address them in their investment practices and processes, it is useful to divide them into three categories (acknowledging that there is significant overlap between them):

Financially material issues

  • These are issues that the investor sees as having the potential to significantly affect (positively or negatively) the financial performance of the investment over the relevant time period. Fiduciaries would expect these issues to be assessed in investment research and decision-making processes as a matter of course.

Non-financially material issues

  • These are issues that, while they may be important to stakeholders, if managed well, do not present a significant threat to (or opportunity for) the business. Fiduciaries would expect companies to demonstrate that they are managing these issues effectively, and should intervene if they were concerned that a failure to manage these issues could lead to financial detriment.

Wider social, economic and environmental issues

  • These are issues that have the potential to significantly affect the investors’ ability to deliver on its organisational or investment objectives but that may have limited financial impact within the relevant time period. For example, these could be issues that affect the stability and health of economic and environmental systems, or they could be issues that are, or have the potential to be, important to beneficiaries or other stakeholders. Investors that have made a commitment to responsible investment would be expected to build consideration of these issues into their investment research and decision-making processes, to play an active ownership role in the companies and other entities in which they are invested, and to engage with policymakers to encourage the development and implementation of appropriate policy responses to these issues.

Materiality is a dynamic concept, and the materiality of ESG issues evolves over time. This evolution is driven by changes in legislation and policy, by changes in risk and the understanding of risk, by changes in the social, environmental and economic impacts of the ESG issue in question, and by changes in societal (and beneficiary) expectations and norms.