How fiduciary duty law incentivises investors to manage sustainability risks
| DOI | 10.1177/13882627211031929 |
| Author | Liudmila Strakodonskaya |
| Date | 01 September 2021 |
| Published date | 01 September 2021 |
| Subject Matter | Articles |
How fiduciary duty law
incentivises investors
to manage sustainability risks
Liudmila Strakodonskaya
Research Centre for Law and Economics (CRED), Paris II Panth´
eon-Assas University, Issy Les Moulineaux, France
Abstract
The compatibility of Environmental, Social and Governance (ESG) risk management with the
investment management requirements under the investors’ fiduciary duties (FD) figures among the
key questions in today’s context of a rapid growth of sustainable investment strategies. Despite
some legal developments, namely, in Europe, investors still have no clear answer to this question,
which leaves them inert in the face of these new, unconventional types of risk. In our research, we
explore the recent advancements in the EU and the US legal practice with the objective to establish
to what extent the FD actually requires investors to consider ESG risks in their investment
management decisions. Through analysis, we define a theoretical decision-making pattern for ESG
risk management set by the current FD law as applied to investors and identify: 1) ESG risk
materiality and 2) the effectiveness of ESG risk hedging as its fundamental elements. Then, we
design a theoretical representation of ESG risk materiality under the FD legal constraints and
identify that the current FD law binds investors to assimilate ESG risks to financial risks; thus, their
management is required only if they are financially material for investments. We show that this
principle equally applies to long-term ESG risks (like climate change); investors are incentivised to
manage only those that are sufficiently financially material considering the applied hypothetical
discount rate. Also, through the case study of a recent US ERISA ESOP lawsuit, we reveal that risk
aversion towards probability to successfully hedge material ESG risks could impede efficient risk
management by incentivising investors not to hedge a material ESG risk, i.e. to breach their FD.
Keywords
Fiduciary duty, institutional investors, pension funds, sustainability, ESG risk factors, materiality,
decision-making under uncertainty, risk management, risk neutrality, risk aversion, trust fiduciary
law, tort liability of negligence, precautionary uncertainty, optimal precaution.
Corresponding author:
Liudmila Strakodonskaya, Sustainable Finance Analyst, Investment Management, Paris, France.
E-mail: strakodonskaya@outlook.com
European Journal of Social Security
ªThe Author(s) 2021
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DOI: 10.1177/13882627211031929
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EJSS
EJSS
2021, Vol. 23(3) 264–278
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