EVOLUTION OF FIDUCIARY DUTY
Fund managers/portfolio managers and executives must act in the best interest of their investors or shareholders. This is known as the fiduciary duty.
The investment landscape is changing and there is an expectation for businesses to act as corporate citizens. That includes acting responsibly and not causing significant harm to the commons. Thus, the inclusion of non-financial risks into investment analysis has the potential to change the fiduciary duty.
A fund manager with strong environmentalism cannot simply decide to commit the money in his or her care to fund projects for ecosystem restoration if it will make the business lose funds. The interest of fund owners remains to maximize profit.
So, we have a conundrum. How does the fiduciary duty expand to take care of corporate citizenship or corporate responsibility?
The UN PRI proposed that the fiduciary duty will evolve with the changing investment landscape. If the material risks are financially material, then it is in the best interest of the fund managers to consider it in I investment analysis. Doing so will be acting in the best interest of the fund owners.
The incorporation of ESG will become the norm as the investment landscape keeps evolving. With more impact investors and socially responsible investors emerging, it is now becoming a trend to screen investment portfolios using ESG criteria.
Lastly, the policy and regulatory Framework is also changing to incorporate ESG factors into investment analysis and investment decision-making.
The fiduciary duty of loyalty and prudence has shaped the investment landscape for centuries. Like everything, it is bound to evolve. Investors are beginning to care not about just making a profit but also actively contributing to social and environmental benefits. Thus, fiduciaries had to care about more than making a profit but also truly act in the best interest of their fund owners.
The so-called non-financial can without doubt have a strong impact on finances. It is not in anybody’s interest to lose money