The Trade-Off Between Sustainable Investment & Fiduciary Responsibility
Research published in the Oxford Academic Capital Markets Journal suggests that the likelihood of achieving significant change in carbon emissions in the real economy by ‘investing in line with net zero’ (a key objective of the Net-Zero Asset Managers Initiative) is unlikely, due to the trade-off between investment risk and fiduciary responsibilities.
While most sustainable investment strategies, such as the adoption of ESG factors, are likely to yield small differences in investment returns, the more effective strategies are more likely to deliver risker returns - effective options such as policy engagement, impact investment and aggressive tilting (taking on higher risk in a sector) are more likely to have real world impacts to emissions but increase investment risks.
Additionally, there exists a conflict of interest between Net-Zero Investment (to limit warming to 1.5°C) and fiduciary responsibilities. An investment strategy such as impact, which is more likely to create real world changes to the economy, is also more likely to trigger fiduciary concerns. These concerns are not likely to give rise to any enforceable legal liability; however, they can possibly make asset managers conclude that the most salient investment strategies are not coherent with the financial responsibility to clients.
Without a clear, explicit mandate from clients, asset managers are not inclined to undertake investments that have the highest chance of meaningfully reducing global warming. For faith-based asset owners (FBAOs), this presents a unique challenge and perhaps an opportunity to express sustainable and faith-consistent investment goals in an explicit investment policy statement, which can perhaps reduce fiduciary-driven constraints on the asset manager(s).