What is fiduciary duty and how is it healing the climate?

15 November 2022

News | Uncategorized

Climate_Change

It’s almost 2023 and a lot has changed in the business world. Most companies have employees working both from home and in office, extremely rich billionaires are buying popular social media apps, and companies are putting the planet first. Having a stronger focus on the environmental impact of a company isn’t just coming from ESG departments but is rather being pushed by an updated version of the concept of fiduciary duty.   

What is Fiduciary Duty? 

Fiduciary duty refers to a relationship in which one party (the fiduciary) is responsible for looking after the best interests of another party (the beneficiary). In the corporate world the executives and board members have a fiduciary duty to shareholders. Climate risks are now something all companies must manage.    

Climate risks must be integrated into a company’s understanding of fiduciary duty if they are serious about maintaining high standards and unlocking investments. Many organizations around the world have adapted this updated version of fiduciary duty as clients, environmentalists, and shareholders demand a better system for reporting and tracking carbon emissions.  

Addressing Climate Risks 

Climate change is not only a huge risk to our planet itself but also to an organization’s profitability and liability. Not taking the proper measures to track, record and ultimately lower an organizations carbon emission is an unexposed risk, that if not being taken care of, puts the company and shareholders at risk. This risk means the company is not fulfilling it’s fiduciary duty. What used to be a moral issue (good environmental stewardship) has become a key element in fulfilling this duty of doing what is most financially beneficial for the company (reducing costs associated with carbon pricing). Corporate boards are pressuring executives to ensure carbon price risk doesn’t threaten profits. Not managing these risks properly leads to financial and repetitional risk exposure.   

Examples of Fiduciary duty in action  

Leaving out climate related risks from a financial point of view can lead into missed factors in the investment decision making. This is why The Financial Stability Board created the Task Force on Climate-related Financial Disclosures (TCFD) which is under the leadership of Michael Bloomberg and countries around the world are making climate disclosures mandatory for all businesses to help manage these risks.

Some companies have taken climate related risks into huge consideration, for example the popular clothing brand Patagonia has coined the new slogan “Earth is now our only shareholder” as the owner Yvon Chouinard said any profit not reinvested in running the business would go to fighting climate change as he gave away his company to a charitable trust working to heal the climate. Investors are putting climate change at the heart of their investment process, signing up for the UN supported PRI or principles for responsible investments which have integrated ESG factors, while others have gone even further and included theses climate related factors straight into their portfolio risks and returns.  

This is just the beginning, as more and more investors are integrating climate risk into their investment thesis to capture opportunities. Meaning, this is no longer a trend, or just a moral issue, being environmentally conscious is simply good business.