Fiduciary duty

Environmental, social, and corporate governance
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The term fiduciary duty refers to the legal obligation of a fiduciary to act in another person's best interest. Financial advisors, trustees, lawyers, and other types of professionals are examples of fiduciaries with certain obligations to their clients.^[1][2]

In the context of public policy, states typically hire fiduciaries such as asset management companies to manage public funds, including public pension investments. One important topic of discussion concerns whether definitions of fiduciary duties should prohibit asset managers from considering non-financial factors such as environmental, social, and corporate governance (ESG) criteria in their investment decisions. For more information on the overlap between fiduciary duties and ESG public policy, click here.

Background

Definitions of fiduciary duties vary by state, and not all fiduciaries share the same responsibilities. For example, the fiduciary responsibilities of a lawyer may differ from those of a real estate agent or an investment manager.^[2]

Typically, fiduciaries are expected to exercise some or all of the following duties in their contractual roles:^[1][2]

• The duty of care refers to the responsibility of fiduciaries to inform themselves as much as possible to maximize their ability to make decisions that benefit their clients.
• The duty of loyalty refers to the responsibility of fiduciaries to act in the best interests of beneficiaries at all times and recuse themselves from decision-making if they have any conflicting interests.
• The duty of good faith refers to the responsibility of fiduciaries to act on behalf of beneficiaries only to the extent allowable under law (fiduciaries cannot advance the interests of beneficiaries through illegal means).
• The duty of confidentiality refers to the responsibility of fiduciaries to keep beneficiaries' personal information private and not use that information for personal gain.
• The duty of prudence refers to the responsibility of fiduciaries to make decisions with the skill, risk awareness, and consideration expected of a prudent person.
• The duty of disclosure refers to the responsibility of fiduciaries to promptly disclose any information materially related to a beneficiary's interests.

Fiduciary duty and environmental, social, and corporate governance (ESG)

See also: Environmental, social, and corporate governance (ESG)

In the context of ESG public policy, discussions of fiduciary duties typically relate to whether investment managers should be allowed to consider certain non-financial ESG criteria when selecting investments or whether such considerations would violate fiduciary responsibilities.^[3]

For example, some opponents of ESG investing have enacted or tried to enact laws requiring that fiduciaries responsible for selecting public investments consider only material financial factors in their decisions. Definitions of material financial factors often include cash flow statements, balance sheets, and other financial statements and exclude considerations that aren't directly related to a company's finances, such as ESG criteria. For more information on the effort to oppose ESG investing through fiduciary definitions, click here.

Some supporters of ESG have adopted opposite approaches and enacted or tried to enact laws requiring that fiduciaries consider non-financial factors such as environmental and diversity goals in public investments. Other supporters have passed laws or rules leaving investment considerations up to the judgment of fiduciaries, allowing but not requiring ESG considerations in public investments. For more information on the effort to support ESG investing through fiduciary definitions, click here.

Noteworthy events

Biden administration proposes change to fiduciary definition under ERISA

The U.S. Department of Labor (DOL) on November 3, 2023, proposed broadening the definition of a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA)—which primarily included pension plan managers and advisors—to govern more financial professional interactions with individual investors in certain contexts.^[4][5] To learn more about the proposed changes, click here.

See also

• Sustainability
• Materiality
• Arguments about environmental, social, and corporate governance (ESG)
• Opposition to environmental, social, and corporate governance (ESG) investing
• Reform proposals related to environmental, social, and corporate governance (ESG)

External links

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Footnotes