Summary report: Investors’ fiduciary duties and systemic climate risks  

This report summarises the final roundtable in a series organised by the Centre for Climate Engagement at Clyde & Co. It explores the link between investors’ legal duties and climate risks, barriers they face in addressing these issues, and possible solutions. While focusing on asset owners with diversified portfolios, the discussion also applies to investment managers. Although the issues discussed are globally relevant, their application may vary depending on legal frameworks in different jurisdictions.  

Introduction 

Climate change threatens the global economy on which investors and their beneficiaries rely. Investment strategies should, where relevant, account for how specific businesses and industries are exposed to climate change. However, the risk to investors from the potential for climate change to damage economic systems cannot be avoided in this way. It poses a more challenging question: should investors seek to address this risk at its source by contributing to wider efforts to tackle climate change and, if so, how? Where investors’ investment goals are threatened, fiduciary duties provide a legal basis for investor action in this area – but determining the best way to act is more challenging. There is also a related question of how to maximise the impact of activity through a sector-wide transformation in investor behaviour. 

Key points: 

• Investors have a legal obligation to balance risk and return to secure financial returns for their beneficiaries. Climate change introduces new financial risks, suggesting that investors are permitted, and in some cases may even be required, to consider these factors in their decision making.
• Climate risks to investors can be divided into institution-specific and systemic risks. Institution-specific risks affect individual investments. Systemic risks, on the other hand, threaten the broader economic system and cannot be diversified away. These risks could have widespread implications for portfolios, potentially leading to significant losses if left unaddressed. 
• Investors have several levers at their disposal to drive climate action. They can invest in companies with strong environmental practices and divest from those with poor records, using this financial influence to push for change. Shareholder engagement, including voting on climate resolutions, can pressure companies to adopt sustainable practices. Additionally, investors can engage with policymakers to advocate for climate policies, helping to create an environment conducive to systemic change. 
• In choosing between these strategies, investors must weigh different factors to determine the most effective approach. Sometimes, it may be more impactful to remain invested and use shareholder power to encourage a company toward sustainable practices. In other cases, divestment may be the preferred option. Ultimately, the most suitable strategy will depend on the specific context, available resources, and the potential for creating the greatest impact on climate change. 
•  Several barriers can impede investors from taking effective climate action. There is often a disconnect between climate ambitions and the current market environment, which can make aligning investment strategies with long-term climate goals challenging. Furthermore, the individual impact of investors may seem negligible, causing hesitation in taking action. The complexity of determining the most effective measures to address systemic climate risks can make investor decision making more difficult.
• To overcome these challenges, cultural change within the investment community may be necessary. Investors need to recognise their role in mitigating systemic climate risks and understand that their fiduciary duties may not prevent them from taking ambitious climate action. Law and policy reforms could facilitate this process by clarifying the link between fiduciary duties and climate change. Moreover, building a robust evidence base on the effectiveness of various strategies can empower investors to make more informed decisions and navigate the complexities of aligning investment strategies with climate goals. 

With thanks to David Roach and Belinda Bell for their comments on this report.