Fiduciary Relationships for Socially Responsible Investing: A Multinational Perspective

• Author: Benjamin J. Richardson
• Published date: 01 September 2011
• Date: 01 September 2011
• DOI: http://doi.org/10.1111/j.1744-1714.2011.01121.x

Fiduciary Relationships for

Socially Responsible Investing: A

Multinational Perspective

Benjamin J. Richardson

n

INTRODUCTION

Socially responsible investing (SRI) is a common practice among f‌inancial

institutions, but it remains unclear whether such institutions can practice

SRI if it fulf‌ills the will of their benef‌iciaries. Addressing both the legal and

practical dimensions of this question, this article aims to resolve a relatively

neglected aspect of f‌iduciary f‌inance law. While there has been a long-

standing public debate in the United States and other countries regarding

the legality of SRI, it has not thoroughly examined all the relevant issues.

The public debate has focused on the f‌inancial materiality of environmen-

tal, social, and governance (ESG) issues to investment performance as a

legal justif‌ication for SRI.

1

However, little analysis has been dedicated to

what weight should be attached to the views of benef‌iciaries in this regard.

The term ‘‘f‌iduciary’’ has its origins in Roman law; the word ‘‘f‌idu-

ciary’’ itself comes from the Latin ‘‘f‌iducia,’’ meaning ‘‘trust.’’ In today’s

usage, it essentially means a person holding the character of a trustee, be-

ing charged to act primarily for another’s benef‌it with regard to specif‌ic

property or affairs.

2

Among the various types of relationships that the law

r2011 The Author

American Business Law Journal r2011 Academy of Legal Studies in Business

597

American Business Law Journal

Volume 48, Issue 3, 597–640, Fall 2011

n

Canada Research Chair in Environmental Law and Sustainability,Faculty of Law, University

of British Columbia.

1

E.g., FRESHFIELDS BRUCKHAUS DERINGER,ALEGAL FRAMEWORK FOR THE INTEGRATION OF ENVIRON-

MENTAL,SOCIAL AND GOVERNANCE ISSUES INTO INSTITUTIONAL INVESTMENT (2005), available

at http://www.unepf‌i.org/f‌ileadmin/documents/freshf‌ields_legal_resp_20051123.pdf; William

Martin, Socially Responsible Investing: Is YourFiduciary Duty at Risk?,90J.BUS.ETHICS 549 (2009);

Benjamin J. Richardson, Do the Fiduciary Duties of Pension Funds Hinder Socially Responsible In-

vestment?,22B

ANKING &FIN.L.REV. 145 (2007).

2

BLACK’SLAW DICTIONARY 702 (9th ed. 2009).

has characterized as having a f‌iduciary character are those that exist in

investment institutions between the individuals who manage the assets and

the benef‌iciaries or members, who contribute capital. At common law and

in legislation, therefore, trustees, fund managers, advisors, and certain

other types of decision makers may be impressed with f‌iduciary status and,

consequently, owe specif‌ic obligations to benef‌iciaries. These obligations

include a duty to act with loyalty for the benef‌it of the benef‌iciaries and a

duty to act reasonably and prudently.

3

In recent decades, there has been a tendency among some courts and

many legal commentators in some Commonwealth countries to conf‌late

f‌iduciary duties with other legal duties in trust law, company law,and other

realms.

4

But Flannigan and others contend that the function of f‌iduciary

law, based on its traditional jurisprudence, is narrower in that it controls

opportunism and self-interested behavior in those situations in which ‘‘an

actor has access to the assets of another for a def‌ined or limited purpose.’’

5

Thus, the f‌iduciary accountability of trustees is established through their

privileged access to the assets of the trust fund. Such f‌iduciary account-

ability, by this approach, should be regarded as functionally distinct from

other specif‌ic legal duties in trust law, which include duties to invest pru-

dently and to act in the best interest of the benef‌iciaries. To commingle

trust law (or other sources of legal duties) with f‌iduciary law might thus be

problematic given that, as Flannigan demonstrates, ‘‘there are different

triggers for liability . . . and different remedial consequences.’’

6

Nonetheless, apart from continuing disagreement about the validity

of this more nuanced conceptualization of f‌iduciary responsibility, whether

we label the duties of institutional investors as part of f‌iduciary law or trust

3

See generally Robert Flannigan, The Boundaries of Fiduciary Accountability,83CAN.B.REV.35

(2004); see also J.C. Shepherd, Towards a Unif‌ied Concept of Fiduciary Relationships,97L.Q.R

EV.

511 (1981); Tamar Frankel, Fiduciary Law,71C

AL.L.REV. 795 (1983).

4

See generally Peter Birks, The Content of Fiduciary Obligation,34ISRAEL L. REV.3 (2000); see also

Alastair Hudson, The Regulation of Trustees,in CONTEMPORARY PERSPECTIVES ON PROPERTY,

EQUITY,AND TRUSTS LAW 163 (M. Dixon & G. Griff‌iths eds., 2007).

5

Robert Flannigan, Fiduciary Duties of Shareholders and Directors, 2004 J. BUS. L. 277, 281. See

also Matthew Conaglen, The Nature and Function of FiduciaryL oyalty, 121 L. Q. REV.452 (2005);

Robert Flannigan, The Core Nature of FiduciaryAccountability,3N

EW ZEALAND L. REV. 375 (2009)

[hereinafter The Core Nature]; D. Gordon Smith, The Critical Resource Theory of FiduciaryDuty,55

VAND.L.REV. 1399 (2002).

6

Flannigan, The Core Nature, supra note 5, at 425.

598 Vol. 48 / American Business Law Journal

law, the underlying substantive rules regarding how fund managers, trust-

ees, and other investment decision makers must act with regard to ben-

ef‌iciaries remain. Most contemporary discussions about f‌iduciary law and

SRI, including the seminal Freshf‌ields report,

7

tend to gloss over the dis-

tinctions being raised by a minority of scholars. Likewise, this debate will

not be further examined for the purposes of this article because it focuses

on issues for which such distinctions are arguably not greatly relevant.

The notion that the law may allow SRI as a means of fulf‌illing the wishes

of the benef‌iciaries is a complex issue. Where investors act for themselves,

there is of course no legal obstacle to SRI because a f‌iduciary relationship does

not exist. But where such a relationship governs investment decisions, if the

benef‌iciaries are unanimous in their views about SRI, trustees may and per-

haps even should take those views into accountaspartoftheirconsideration

of the benef‌iciaries’ ‘‘best interests.’’ However, some SRI issues involve deeply

contested ethical dilemmas for which there is no established ethical custom,

such as animal welfare, consumption of alcohol, and fertility control. Other

SRI issues involve market failures, where the problem is not that an activity

might be viewed as intrinsically objectionable, but rather the fact that there is

too much of the activity occurring (e.g., emitting greenhouse gases, overf‌ish-

ing, and deforestation). Agreement on the need to control these activities

might be more attainable, but there remain signif‌icant differences of opinion

in how to do so and what should be the price for corrective action.

By focusing on the will of benef‌iciaries, in this article I wish to broaden

the SRI debate beyond the interpretation of trust and f‌iduciary duties to

consider also the implications of the f‌iduciary relationship between trustees

and benef‌iciaries. This relationship provokes several important legal and

practical questions regarding SRI. First, while it is widely agreed that trustees

must act in the ‘‘best interests’’ of benef‌iciaries, how are those interests to be

deciphered, and can benef‌iciaries instruct trustees on how they should act?

Second, because a f‌inancial institution such as a pension fund typically has

many benef‌iciaries, may a trustee act when there is an absence of unanimity

among them regarding the desirability of SRI? Third, to what extent can

legislation, social mandates, and community norms serve as a proxy for the

will of benef‌iciaries upon which trustees could act? Fourth, if no consensus

exists among benef‌iciaries, to what e xtent may trustees rely on consultation

processes or even having benef‌iciaries’ representatives appointed to

7

FRESHFIELDS BRUCKHAUS DERINGER,supra note 1.

2011 / Fiduciary Relationships for Socially Responsible Investing 599