Environmental Governance through Fiduciary Finance

By Benjamin J. Richardson, Osgoode Hall Law School, York University

The long-standing movement for socially responsible investment (SRI) promises to be a means of environmental governance, by promoting consideration of environmental costs and benefits when financiers fund corporate developments. In recent years, some governments have begun to recognize this potential by introducing forms of responsive regulation, such as informational and incentive policy mechanisms, that aim to encourage voluntary action by financiers.

But governments in common law jurisdictions have yet to alter the core fiduciary (trust law) duties of the trustees and fund managers in investment institutions, which continue to pose a barrier to SRI. Until now, fiduciary duties have been seen as a hindrance because the obligation to “invest prudently” has been understood as mandating the highest financial returns. Thus, environmental and social issues usually only receive attention if they can be perceived as “financially material” (ie, financial risks or opportunities) for investors.

Another legal dimension of fiduciary finance that has not been adequately appreciated as an influence on SRI is the weight to be attached to the will of beneficiaries. While it might seem intuitive that SRI should be legally permissible if that is the preference of beneficiaries in a pension fund or other financial institution, trust law in fact thwarts the democratic process in investment decision-making. While trust law requires trustees to promote the “best interests” of beneficiaries, it does not strongly recognize any rights of beneficiaries to be consulted or to issue instructions to trustees or fund managers. Moreover, the duty to treat beneficiaries even-handedly can hinder responding to beneficiaries when they are not unanimous in their views.

If we wish to harness SRI as a means of “responsive” environmental governance, governments will need to reform fiduciary norms to ensure that the decision-making processes of financial institutions are more democratic, transparent and accountable to goals beyond the mere “bottom line”.