Fiduciary managers pursuing an investment strategy aligned with the 1.5ºC goal may be risking triggering fiduciary concerns, according to a new report.

The study – Can investors save the planet? NZAMI and fiduciary duty  – noted that asset managers who have signed the Net Zero Asset Manager Initiative (NZAMI), part of the Glasgow Financial Alliance for Net Zero, have committed to investing in line with the goal of limiting global warming to 1.5ºC, with limited or no overshoot.

However, given that a recent report from the UN Environment Programme says there is “no credible pathway” in place to 1.5ºC, the paper explores the implications for fiduciary managers of investing in line with a climate scenario that could be considered unlikely.

“The starting point for fiduciary managers is that they are investing other people’s money and so need to ask what is in their client’s best interests,” Tom Gosling, executive fellow at London Business School and European Corporate Governance Institute and co-author of the report, told IPE.

“Investing in line with 1.5ºC can expose clients to investment risk if, as unfortunately seems likely, the world warms more than this – so does this meet their fiduciary duty to them?”

He added: “Second, if investors cling to the ideal of a 1.5ºC scenario when the actual outcome will be 2ºC to 2.5ºC, then they may be missing opportunities for clients arising from the higher increase in temperature scenario, and that means they haven’t done the best job for their client.”

With the client’s agreement, investing in line with a 1.5ºC scenario is fine, Gosling said, regardless of potential costs or risks: “But without that specific mandate, a fiduciary manager can’t decide to do so if it costs clients money.”

The report, co-authored by Iain MacNeil, Alexander Stone professor of commercial law at the University of Glasgow, said that although these concerns are, other than in extreme cases, unlikely to give rise to enforceable legal liability, it is likely that many asset managers, when applying an expected standard of fiduciary duty, will not follow strategies that meaningfully contribute towards a 1.5ºC world, unless there is an explicit authorising mandate from clients.

As a result, it said, the strategies most likely to be adopted are ones that superficially align with 1.5 ºC, but are also the least likely to contribute meaningfully to addressing climate change.

“The easiest way to look as if you are aligning with a 1.5ºC scenario is to divest, for instance from fossil fuel stocks”

Tom Gosling, executive fellow at London Business School and European Corporate Governance Institute

“The easiest way to look as if you are aligning with a 1.5ºC scenario is to divest, for instance from fossil fuel stocks,” Gosling told IPE.

“But that won’t change the allocation of capital, because someone else will buy your stock. That strategy doesn’t have much impact on the real world. And while an asset manager is unlikely to get sued for breach of fiduciary duty for doing that, it could lead to accusations of greenwashing.”

According to Gosling, another obstacle for investors wishing to create an impact is that many projects intended to help developing countries transition to a low-carbon economy are not going ahead because they are too risky or offer low returns.

“It’s fine to invest in these projects if the client accepts the risk/return profile, but the manager can’t invest in them off their own bat,” said Gosling.

The report suggests ways in which commitments could be reframed to maximise the real-world impact of the net zero initiative, while avoiding conflicts with the fiduciary duties of asset managers who are signatories. 

“It is important to get clarity on commitments,” Gosling told IPE. “Asset managers need to be extremely careful about the detail of claims they’re making with respect to net zero. The world is decarbonising, certainly, but asset managers can’t control how quickly the transition happens, and trying to influence the pace of transition through how they invest can give rise to costs and risks for clients. They should be educating clients so they can make an informed choice about those areas where the clients are prepared to accept increased risks or reduced returns, and in a transparent way.”

And he concluded: “If investors want real-world impact, they need to be clear about the costs they are prepared to bear, and communicate that to their asset managers.”

Read the digital edition of IPE’s latest magazine