The SRI fiduciary cop-out

Blaine Aikin

Published 1/1/2008 » More From This Issue

Print This Article

Return To Article

Normal Text

Large Text

As CEO of a company devoted to building a culture of fiduciary responsibility, it drives me crazy to hear that fiduciary concerns are holding some advisors back from recommending socially responsible investing strategies. It is a common misperception that SRI is incompatible with the fiduciary obligations of advisors and their clients, most notably pension plans.

While incorrect, this view is often persuasively supported by reference to an incontrovertible tenant of fiduciary responsibility: A fiduciary cannot allow any set of personal convictions to undermine sound investment strategy. To do so would breach the fiduciary’s duty of loyalty and violate the exclusive purpose rule that requires a singular focus on the investors’ best interests. But it is contorted logic to suggest that this undermines SRI. That position is based upon the false premises that SRI necessarily divides loyalties and serves competing purposes.

Divided loyalty requires conflicting interests. For SRI to be incompatible with the duty of loyalty, the interests of society and investors would have to be inherently at odds. This is preposterous. The capitalist system is dependent upon a stable and sustainable society. This is not to say that all socially responsible investment strategies align with portfolio beneficiaries’ interests, but there is clearly no reason to believe that none will.

SRI criteria generally fit seamlessly in the due diligence processes used to select investments. So long as they support sound investment decisions, they strengthen adherence to the exclusive purpose rule. The primary payoff of more thorough due diligence is improved investment results. Societal benefits are important byproducts.

Thus, not evaluating environmental, social and governance factors is more likely to raise the level of fiduciary risk than reduce it. Consider the following imperatives of a competent due diligence process and the associated ramifications of incorporating SRI considerations:

Manage risk — Corporate irresponsibility increases risk. Nowhere is this more evident than in the environmental realm. Conduct that contributes to global warming has recently been referred to as the next tobacco for class action litigation. “Fiduciary risk of environmental liability” yields nearly 2 million Google search results.
Evaluate factors that contribute to returns — Effective resource management improves returns. Excessive executive compensation is a drag on returns, as is inattention to energy and waste management when operating production processes. Take a close look at the Dow Jones Sustainability Indexes to better understand the logic that links sustainability to investment performance.
Incorporate time horizon considerations — Fiduciaries are obligated to equitably consider the interests of all beneficiaries. Money in trusts may be managed for multiple generations. The longer the time horizon, the greater the imperative to consider long term ramifications to the economy, markets, and specific securities associated with corporate behavior.
Reduce uncertainty — Efficient capital markets depend upon robust and reliable information. Consider the recent public scrutiny of investments made by companies in the Sudan. Such investments are widely perceived to help bankroll the genocide in Darfur, in addition to the fact that the Sudan is a risky place to run a business. Revelations on matters like these damage brands and depress stock prices. Prudence dictates having a process to gather intelligence to reduce uncertainty — SRI helps accomplish that.

The downside of SRI is the added effort it requires of practitioners. That is the cost incurred for the benefits of more thorough analysis, more informed advice, and reduced investment and fiduciary risks.

The bottom line is this: both investors and their advisors can, in fact, do well (probably better) by doing good through conscientious application of SRI strategies. That doesn’t mean we won’t continue to hear the argument that “fiduciary concerns” are obstacles to SRI. However, this objection is looking more and more like copping out from the added work it takes to be both successful and virtuous.

*For further information or to contact this author, please use the forum below.

Manage risk — Corporate irresponsibility increases risk. Nowhere is this more evident than in the environmental realm. Conduct that contributes to global warming has recently been referred to as the next tobacco for class action litigation. “Fiduciary risk of environmental liability” yields nearly 2 million Google search results.
Evaluate factors that contribute to returns — Effective resource management improves returns. Excessive executive compensation is a drag on returns, as is inattention to energy and waste management when operating production processes. Take a close look at the Dow Jones Sustainability Indexes to better understand the logic that links sustainability to investment performance.
Incorporate time horizon considerations — Fiduciaries are obligated to equitably consider the interests of all beneficiaries. Money in trusts may be managed for multiple generations. The longer the time horizon, the greater the imperative to consider long term ramifications to the economy, markets, and specific securities associated with corporate behavior.
Reduce uncertainty — Efficient capital markets depend upon robust and reliable information. Consider the recent public scrutiny of investments made by companies in the Sudan. Such investments are widely perceived to help bankroll the genocide in Darfur, in addition to the fact that the Sudan is a risky place to run a business. Revelations on matters like these damage brands and depress stock prices. Prudence dictates having a process to gather intelligence to reduce uncertainty — SRI helps accomplish that.