Fiduciary duty includes social costs: report

Canadian money managers need to stop viewing environmental issues as costs to be avoided and accept that their fiduciary duty requires they address such risks, according to a report by the National Roundtable on the Environment and the Economy.

The NRTEE report calls on all fiduciaries to adopt disclosure practices on environmental, social and governance considerations and encourages them to adopt the United Nations–sponsored Principles for Responsible Investment.

“The TSX is probably the stock exchange which is most exposed to these issues,” says David Wheeler, dean of the faculty of management at Dalhousie University. “To be frank, Canadian companies listed on the TSX need this kind of thinking.”

Too many fiduciaries, he says, take the outdated view that their duty to stakeholders is limited to maximizing returns. In reality, the role of the fiduciary is to minimize the risks to which investors’ portfolios are exposed.

“The costs that are involved here are enormous,” he warned. “If you just take 2005 as an example, the cost of climate change and natural disasters was well in excess of $200 billion. Guess what — the environment has arrived as a salient risk issue for business.”

Wheeler suggests that pension fund managers in particular, with their vast pools of capital, may be leaving their firms and clients open to future class action suits.

“There are unacceptable levels of ignorance on the fiduciary duty question, from fund managers, from financial advisors and from trustees of pension funds,” he said. “This is about having a modern attitude to risk; it’s about making sure that risk is really understood by fiduciaries. There’s hardly any reason these days to make the case against the fact that fiduciary duty requires you to think about these issues.”

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The Canadian market is uniquely handicapped, however. Wheeler points out that in the U.K., it took only a single statement in Parliament by the minister responsible for pensions, for social responsibility issues to be recognized as part of managers’ fiduciary duty.

“The sky did not collapse when that happened four or five years ago,” Wheeler said. “Everyone survived, and the value of pension funds was maintained.”

Such an easy fix is not available to Canada, however, with its fractured regulatory environment, where each province has its own pension fund authority.

Another structural hurdle to tackling climate change is the regional nature of energy policy in Canada. Overcoming internal political divisions in Canada could be almost as difficult as addressing climate change, says Glen Murray, chair of NRTEE.

“In Canada, we have one of the worst political systems to actually implement change. We are the only nation in the world in which energy is a responsibility of sub-national governments,” Murray said. “If you want to start a revolution in this country, you say things like ‘national energy policy’ or ‘carbon tax.'”

Far from being a cost for industry, implementation of a carbon credit trading system could unlock a new source of wealth for some companies.

“Canadian corporations are at a distinct disadvantage. They can’t participate in that market because we don’t have a carbon market system in Canada,” said Brian Kelly, director of the Sustainable Enterprise Academy at York University’s Schulich School of Business. “I would expect pretty soon that the big companies that have carbon credits to sell, and those that need carbon credits, are going to be squawking because the federal government has not allowed them to participate in the global economy.”

He points to DuPont Canada as an example of a company that has amassed millions of dollars in carbon credits because it altered its production methods over the past decade in anticipation of such a carbon market.

“We at TSX Group have an interest in these matters for at least two reasons,” said Richard Nesbitt, CEO of the TSX. “First, we have hundreds of customers in the form of public companies who are heavily involved in these issues. Secondly, TSX Group itself has world-class trading technology that can be applied to the development of a carbon market in this country, which should be considered one of the ways to fight climate change.”

But the biggest challenge remains changing the business community’s mindset regarding environmental protection.

“We still have this hopelessly outdated notion that the environment is a cost,” said Wheeler. “Guess what — the way the world is going, the environment is anything but a cost.”

To back that up, he pointed to the report out last year from Nicholas Stern, the former chief economist of the World Bank, which estimated that to do nothing on climate change would cost 20% of global GDP. To address the issues now would probably cost only 1%.

“That is not a cost; that is an investment. We make that 1% investment now, and we defray much worse outcomes in terms of the global economy down the road. This is about opportunity, not cost,” said Wheeler. “It is incumbent on fund managers, financial advisors, regulators and stock exchanges to make the changes necessary to encourage the economics of the future, rather than protecting the unsustainable practices of the past.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(02/12/07)

Steven Lamb