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Fiduciary duty: are your investments fit for the future?

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For a number of years, many in the ‘mainstream’ investor community have rebuffed attempts to get them to take sustainability concerns into account in their investments, by saying that it goes against their fiduciary duty to provide the best possible returns for their investors. It is an argument that is becoming ever-harder to make.

This article originally appeared in Blue & Green Tomorrow’s Guide to Sustainable Investment 2014.

The case against considering sustainability, or environmental, social and governance (ESG) issues emerged from the origins of sustainable investment in the ethical investment movement. Ethical investors, many of them representing religious groups, excluded certain ‘sin stocks’ such as alcohol, weapons, gambling, smoking and pornography, from their portfolios because these activities conflict with their beliefs.

The argument was then codified in 1984 in a case involving the National Union of Mineworkers pension fund during the miners’ strike, when a judge ruled against the union’s attempts to make the pension scheme invest in line with the union’s policies.

The judge said the financial interests of the scheme’s beneficiaries should be the paramount consideration of the trustees”, says Melanie Wadsworth, a partner at the law firm Faegre Baker Daniels. “People have tended to interpret the judgement as stating that profit maximisation is the most important thing and should override any other interests.”

The judge’s position was actually more nuanced than this. He said, “I am not asserting that the benefit of the beneficiaries which a trustee must make his paramount concern inevitably and solely means their financial benefit… ‘benefit’ is a word with a very wide meaning, and there are circumstances in which arrangements which work to the financial disadvantage of a beneficiary may yet be for his benefit.”

Nonetheless, the judgement was seized upon by investors to make profit maximisation the received wisdom for the next two decades and this approach contributed to a focus on short-term returns at the expense of long-term sustainable investment value.

Then in 2005, the law firm Freshfields produced a report for the United Nations Environment Programme (UNEP) that suggested, “It may be a breach of fiduciary duties to fail to take account of ESG considerations that are relevant and to give them appropriate weight, bearing in mind that some important economic analysts and leading financial institutions are satisfied that a strong link between good ESG performance and good financial performance exists.”

There is still a healthy ethical investing sector today – according to research group EIRIS, some £12.2 billion was invested in green and ethical retail funds in the UK in 2013, up from £4 billion in 2001. But the wider sustainable investment market takes a more positive approach than the negative screening employed by ethical funds, with investors more focused on picking winners than on excluding sinners.

There is absolutely nothing about fiduciary duty that stops you taking ESG issues into account”, says Sandra Carlisle, head of responsible investment at Newton Investment Management. “ESG issues can create business, operational, financial, brand and reputational risks. It would be remiss of us not to take them into account.”

Those people that are still confusing ESG with ethical exclusions are just looking for a way to avoid getting involved in the debate, she says, but adds that “there is a greater understanding now that non-financial issues are actually financial, especially when something goes wrong”.

You don’t have to look far for examples of things going wrong that have a strong ESG element to them – from the horsemeat scandal to BP’s Gulf of Mexico oil spill to the deadly fire at Rana Plaza in Bangladesh or most recently, the German utility RWE posting its first ever loss and admitting that it had failed to embrace renewable energy early enough. “It’s not about ethics, it’s about good risk management”, Carlisle says.

With the UK’s Stewardship Code requiring institutional investors to disclose how they are discharging their stewardship responsibilities in the companies they hold shares in, there is a growing acceptance that far from being a drag on earnings, there is a link between good performance on ESG issues and financial performance, adds Wadsworth.

Indeed, Christina Figueres, head of the United Nations Framework Convention on Climate Change, recently told an investor summit in New York that “institutional investors who ignore climate risk face being increasingly seen as blatantly in breach of their fiduciary duty to their beneficial owners – men and women who have worked hard all their lives to put away something for their retirement and for their children”.

Calling for investors to speed up the rate at which they green their portfolios, she added, “The pensions, life insurances and nest eggs of billions of ordinary people depend on the long-term security and stability of institutional investment funds. Climate change increasingly poses one of the biggest long-term threats to those investments and the wealth of the global economy.

Investment decisions need to reflect the clear scientific evidence, and fiduciary responsibility needs to grasp the intergenerational reality: namely that unchecked climate change has the potential to impact and eventually devastate the lives, livelihoods and savings of many, now and well into the future.”

If you are taking a long-term view of your assets but not asking how that asset will be successful in future, it is difficult to say that you are meeting your fiduciary duty, argues David Bent, head of sustainable business at Forum for the Future. “The actual legal meaning has become separated from the meaning that people carry around in their heads. Many people think that it means you have to try to maximise returns at all times. But there is a big difference between maximising returns for the short-term and achieving satisfactory returns over the longer term.”

There has been a shift from thinking that the company has an impact on the world that must be minimised to a realisation that the world has an impact on the company and managers and investors need to be on top of that, he adds.

Many of those who discount the importance of a focus on ESG issues are “still critiquing the corporate social responsibility (CSR) initiatives of a decade ago”, Bent says. “You need to be sure that the sectors you are investing in are fit for the future. If you are not encouraging the companies in that sector to be fit for the future, your investment is at risk.”

But it is also important to remember that being mindful of ESG issues throws up new opportunities as well, whether that is in clean energy, more robust supply chains or more efficient production processes that use less water, energy and resources. It is becoming ever-clearer that sustainability and fiduciary duty are complementary concepts, not in conflict with each other.

Mike Scott is a freelance writer specialising in environment and business issues for the press and corporate clients. His work has been published in the Financial Times, the Times, the Guardian and the Daily Telegraph as well as in business publications ranging from Bloomberg New Energy Finance to Forbes.

Further reading:

MPs issue stark ‘carbon bubble’ warning to investors and finance world

The good, the bad and the ugly: what are pension funds doing about climate change?

UKSIF: current fiduciary laws leave investment trustees ‘confused’

Fiduciary responsibility in the context of a global emergency

The Guide to Sustainable Investment 2014

Mike Scott is a freelance writer specialising in environment and business issues for the press and corporate clients. His work has been published in the Financial Times, the Times, the Guardian and the Daily Telegraph as well as in business publications ranging from Bloomberg New Energy Finance to Forbes.

Economy

Will Self-Driving Cars Be Better for the Environment?

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self-driving cars for green environment
Shutterstock Licensed Photo - By Zapp2Photo | https://www.shutterstock.com/g/zapp2photo

Technologists, engineers, lawmakers, and the general public have been excitedly debating about the merits of self-driving cars for the past several years, as companies like Waymo and Uber race to get the first fully autonomous vehicles on the market. Largely, the concerns have been about safety and ethics; is a self-driving car really capable of eliminating the human errors responsible for the majority of vehicular accidents? And if so, who’s responsible for programming life-or-death decisions, and who’s held liable in the event of an accident?

But while these questions continue being debated, protecting people on an individual level, it’s worth posing a different question: how will self-driving cars impact the environment?

The Big Picture

The Department of Energy attempted to answer this question in clear terms, using scientific research and existing data sets to project the short-term and long-term environmental impact that self-driving vehicles could have. Its findings? The emergence of self-driving vehicles could essentially go either way; it could reduce energy consumption in transportation by as much as 90 percent, or increase it by more than 200 percent.

That’s a margin of error so wide it might as well be a total guess, but there are too many unknown variables to form a solid conclusion. There are many ways autonomous vehicles could influence our energy consumption and environmental impact, and they could go well or poorly, depending on how they’re adopted.

Driver Reduction?

One of the big selling points of autonomous vehicles is their capacity to reduce the total number of vehicles—and human drivers—on the road. If you’re able to carpool to work in a self-driving vehicle, or rely on autonomous public transportation, you’ll spend far less time, money, and energy on your own car. The convenience and efficiency of autonomous vehicles would therefore reduce the total miles driven, and significantly reduce carbon emissions.

There’s a flip side to this argument, however. If autonomous vehicles are far more convenient and less expensive than previous means of travel, it could be an incentive for people to travel more frequently, or drive to more destinations they’d otherwise avoid. In this case, the total miles driven could actually increase with the rise of self-driving cars.

As an added consideration, the increase or decrease in drivers on the road could result in more or fewer vehicle collisions, respectively—especially in the early days of autonomous vehicle adoption, when so many human drivers are still on the road. Car accident injury cases, therefore, would become far more complicated, and the roads could be temporarily less safe.

Deadheading

Deadheading is a term used in trucking and ridesharing to refer to miles driven with an empty load. Assume for a moment that there’s a fleet of self-driving vehicles available to pick people up and carry them to their destinations. It’s a convenient service, but by necessity, these vehicles will spend at least some of their time driving without passengers, whether it’s spent waiting to pick someone up or en route to their location. The increase in miles from deadheading could nullify the potential benefits of people driving fewer total miles, or add to the damage done by their increased mileage.

Make and Model of Car

Much will also depend on the types of cars equipped to be self-driving. For example, Waymo recently launched a wave of self-driving hybrid minivans, capable of getting far better mileage than a gas-only vehicle. If the majority of self-driving cars are electric or hybrids, the environmental impact will be much lower than if they’re converted from existing vehicles. Good emissions ratings are also important here.

On the other hand, the increased demand for autonomous vehicles could put more pressure on factory production, and make older cars obsolete. In that case, the gas mileage savings could be counteracted by the increased environmental impact of factory production.

The Bottom Line

Right now, there are too many unanswered questions to make a confident determination whether self-driving vehicles will help or harm the environment. Will we start driving more, or less? How will they handle dead time? What kind of models are going to be on the road?

Engineers and the general public are in complete control of how this develops in the near future. Hopefully, we’ll be able to see all the safety benefits of having autonomous vehicles on the road, but without any of the extra environmental impact to deal with.

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Economy

New Zealand to Switch to Fully Renewable Energy by 2035

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renewable energy policy
Shutterstock Licensed Photo - By Eviart / https://www.shutterstock.com/g/adrian825

New Zealand’s prime minister-elect Jacinda Ardern is already taking steps towards reducing the country’s carbon footprint. She signed a coalition deal with NZ First in October, aiming to generate 100% of the country’s energy from renewable sources by 2035.

New Zealand is already one of the greenest countries in the world, sourcing over 80% of its energy for its 4.7 million people from renewable resources like hydroelectric, geothermal and wind. The majority of its electricity comes from hydro-power, which generated 60% of the country’s energy in 2016. Last winter, renewable generation peaked at 93%.

Now, Ardern is taking on the challenge of eliminating New Zealand’s remaining use of fossil fuels. One of the biggest obstacles will be filling in the gap left by hydropower sources during dry conditions. When lake levels drop, the country relies on gas and coal to provide energy. Eliminating fossil fuels will require finding an alternative source to avoid spikes in energy costs during droughts.

Business NZ’s executive director John Carnegie told Bloomberg he believes Ardern needs to balance her goals with affordability, stating, “It’s completely appropriate to have a focus on reducing carbon emissions, but there needs to be an open and transparent public conversation about the policies and how they are delivered.”

The coalition deal outlined a few steps towards achieving this, including investing more in solar, which currently only provides 0.1% of the country’s energy. Ardern’s plans also include switching the electricity grid to renewable energy, investing more funds into rail transport, and switching all government vehicles to green fuel within a decade.

Zero net emissions by 2050

Beyond powering the country’s electricity grid with 100% green energy, Ardern also wants to reach zero net emissions by 2050. This ambitious goal is very much in line with her focus on climate change throughout the course of her campaign. Environmental issues were one of her top priorities from the start, which increased her appeal with young voters and helped her become one of the youngest world leaders at only 37.

Reaching zero net emissions would require overcoming challenging issues like eliminating fossil fuels in vehicles. Ardern hasn’t outlined a plan for reaching this goal, but has suggested creating an independent commission to aid in the transition to a lower carbon economy.

She also set a goal of doubling the number of trees the country plants per year to 100 million, a goal she says is “absolutely achievable” using land that is marginal for farming animals.

Greenpeace New Zealand climate and energy campaigner Amanda Larsson believes that phasing out fossil fuels should be a priority for the new prime minister. She says that in order to reach zero net emissions, Ardern “must prioritize closing down coal, putting a moratorium on new fossil fuel plants, building more wind infrastructure, and opening the playing field for household and community solar.”

A worldwide shift to renewable energy

Addressing climate change is becoming more of a priority around the world and many governments are assessing how they can reduce their reliance on fossil fuels and switch to environmentally-friendly energy sources. Sustainable energy is becoming an increasingly profitable industry, giving companies more of an incentive to invest.

Ardern isn’t alone in her climate concerns, as other prominent world leaders like Justin Trudeau and Emmanuel Macron have made renewable energy a focus of their campaigns. She isn’t the first to set ambitious goals, either. Sweden and Norway share New Zealand’s goal of net zero emissions by 2045 and 2030, respectively.

Scotland already sources more than half of its electricity from renewable sources and aims to fully transition by 2020, while France announced plans in September to stop fossil fuel production by 2040. This would make it the first country to do so, and the first to end the sale of gasoline and diesel vehicles.

Many parts of the world still rely heavily on coal, but if these countries are successful in phasing out fossil fuels and transitioning to renewable resources, it could serve as a turning point. As other world leaders see that switching to sustainable energy is possible – and profitable – it could be the start of a worldwide shift towards environmentally-friendly energy.

Sources: https://www.bloomberg.com/news/articles/2017-11-06/green-dream-risks-energy-security-as-kiwis-aim-for-zero-carbon

https://www.reuters.com/article/us-france-hydrocarbons/france-plans-to-end-oil-and-gas-production-by-2040-idUSKCN1BH1AQ

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