A legal duty

Investors have a fiduciary duty to manage climate change financial risks to their portfolios. DivestInvest to help manage the risk.

Introduction: A legal duty

Introduction: A legal duty

1. Climate is a material risk to investments

Investors have a fiduciary duty to manage material risk that can undercut financial performance.

The potential financial impacts of climate change are now widely reported. It is understood that climate change beyond 2°C would have very damaging economic impacts on all asset classes in ways that could not be hedged. A study by Cambridge University, for instance, found future climate risks could lead to economic shocks and losses of up to 45% in an equity investment portfolio value. The Economist Intelligence Unit found warming of 5°C could result in US$7 trillion in losses – more than the total market capitalization of the London Stock Exchange – while 6°C of warming could lead to a present value loss of US$13.8 trillion of financial assets, roughly 10% of the global total.

1. Climate is a material risk to investments Drought in Bogor, Indonesia. Image: Danumurthi Mahendra

Future climate risks [from 4°C warming] could lead to economic shocks and losses of up to 45% in an equity investment portfolio value.

Cambridge Institute for Sustainability Leadership Unhedgeable Risk, 2015

2. Fiduciary duty to address climate risk

Since climate risk is a material risk, fiduciaries have a duty to consider it and align their investments accordingly. In particular, they should limit investments in companies that will be hurt by the energy transition, such as fossil fuel companies.

Evolving standards on fiduciary duty suggest trustees and other fiduciaries must divest, or find other suitable means of managing new and material climate risks.

Experts advise fiduciaries to adhere to the following legal chronology:

  1. Fiduciaries must consider financial risks to their investment portfolios.
  2. There is strong evidence that climate change poses financial risks to investments.
  3. Fiduciaries must therefore consider this risk and the financial implications.
  4. If fiduciaries determine climate risk is material to the performance of their particular fund, they must put in places measures to manage – such as DivestInvest.
  5. If fiduciaries fail to address climate risk they are susceptible to legal challenge.

 

2. Fiduciary duty to address climate risk Lloyds of London

Trustees are increasingly expected to look beyond portfolio performance to the intentional management of systemic risks and rewards, reflecting the longer term interests of their beneficiaries. Over time, this will likely become an enforceable obligation.

Ed Waitzer, Professor and Jarislowsky Dimma Mooney Chair at the Osgoode Hall Law School of York University.

3. Mission alignment

Fiduciaries of mission-based organizations, such as charities and faith groups, have additional responsibilities to ensure that their investments do not undermine their missions. Organizations whose objectives focus on human development and health, alleviating poverty, protecting ecosystems, and other similar aims, must consider whether their investments worsen these issues. If the answer is yes, they must divest according to UK law.

3. Mission alignment Women test a solar cooker in India. Image: UN

Where a clear conflict exists, trustees of charities must divest from carbon intensive investments, regardless of the financial consequences.

Christopher McCall QC

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