This document discusses fiduciary duty and climate change risks for institutional investors. It makes the following key points: 1) Institutional investors face physical, liability, and transition risks from climate change that could impact their portfolios. They need to understand and address these opportunities and risks. 2) Fiduciary duty requires putting clients' interests first, but investors currently lack information and tools to properly assess climate change risks. Disclosure and fiduciary duty must be better linked to address long-term sustainability factors. 3) Various principles and frameworks call for considering environmental and social impacts, but clarification is still needed on how fiduciaries can integrate these non-financial factors given legal interpretations of their duties. More work

1. FIDUCIARY DUTY AND
CLIMATE CHANGE
Adrian Blundell-Wignall
COP21 - Le Bourget
10 December 2015
COP21 Session on Governance of Institutional Investments:
Fiduciary standards for addressing green finance and the
portfolio impact of climate change
Adrian Blundell-Wignall is Special Advisor to the OECD Secretary-General on Financial Markets
and Director in the Directorate for Financial and Enterprise Affairs. The views expressed here
belong to the author and do not reflect the views of OECD member countries.

2. Mark Carney
2
• Physical risks: direct impact from climate- and
weather-related events.
• Liability Risks: compensation for parties who have
suffered loss or damage from the effects of climate
change.
• Transition Risks: changes in policy, technology and
physical risks prompting a reassessment of a large range
of asset values.
Institutional investors need to be in a position to
understand and act effectively on the opportunities and
risks presented by climate change and green finance.

3. Long-term Decisions & Fiduciaries
3
• Fiduciaries are agents that act on behalf of asset owners, policy
holders, annuity recipients and the like. Their future welfare
depends on their agents doing things well.
• Equity and some debt markets are meant to fund long-term
investment and provide good returns to investors/savers without
undue risk. Equities must produce long-term value.
• But the investment chains of agents are long with many
intermediaries.
--Often with misaligned incentives & short-term trading.
--And short-termism is often encouraged by the principals,
such as those clamouring for yield and buybacks.
• Companies and investors make bad decisions and beneficiaries
can do little to control it.

4. Fiduciary Duty and Disclosure are
Linked
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• Short-term decisions jeopardise long term sustainability in
favour of short-term profits.
• Good decisions envisage holding shares for many years and
--Monitoring of decisions
--Engaging with company directors
• Fiduciary standards require client interests to be put first—
pension fund members; policy holders of insurance companies;
annuity recipients.
• But to do this requires information and modelling—and this is
where the problem starts in terms of the difficulty of
meeting fiduciary duties.
• Disclosure and fiduciary duty must be linked.

5. OECD Instruments & Principles - 1
5
OECD Guidelines for Multinational Enterprises 2011
VI. Environment
Enterprises should establish:
(a) “Collecti0n and evaluation of adequate & timely information
regarding the environmental, health, and safety impacts of their
activities”.
(b) “Establishment of measurable objectives and, where appropriate,
targets for improved environmental performance and resource
utilisation, including periodically reviewing the continuing relevance of
these objectives; where appropriate, targets should be consistent with
relevant national policies and international environmental
commitments”.
(c) “Regular monitoring and verification of progress toward
environmental, health and safety objectives or targets”.

6. OECD Instruments & Principles - 2
6
G20/OECD Corporate Governance Principles
VI. The responsibilities of the board
A. Board members should act on a fully informed basis, in good
faith, with due diligence and care, and in the best interest of the
company and the shareholders.
--the duty of care: to act in a fully informed basis; and satisfied that key
information and compliance are sound
--the duty of loyalty: to the company and shareholders (not the controlling
company); effective implementation of all the Principles.
--The principles cross reference the Guidelines for Multinational
Enterprises and refer to the environment.
G20/OECD High Level Principles on Long-term Investment
Financing by Institutional Investors
--Measure, monitor & manage risks for long-term assets.

7. Fiduciary Standards
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• In the narrow sense are a legal concept established by case law (judge made)
mainly in Anglo-Saxon countries and is less legalistic elsewhere.
--Applies to pension trustees
--Annuity providers
• There are trust deeds that may establish fiduciary duty to focus on short-term
returns and not to consider long-term factors which are uncertain and may impact
the short-term returns, including:
--Environment
--Social impact
--Sustainability
• This may be due to narrow-risk averse legal advice to protect advisors and fund
managers. A litigation issue—you can be sued. “The obligation of loyalty’, so a
breach constitutes disloyalty (‘incompetence’ is not enough).
--Can and should the term fiduciary be better defined?
• Strict legal definition: the principal is reliant on the knowledge, expertise and
discretion of the agent, to which the strictest duties of loyalty and prudence are
applicable.
• DUTY OF CARE: does it have a more general interpretation.

8. In Practice
8
• The investment chain at all its points should:
--Act in good faith
--Act in the best long-term interests of beneficiaries and clients
--Act in the general prevailing standards of decent behaviour
• Conflicts of interest avoided or disclosed
• Should not be contractually overridden
• Fiduciary duty is the legal backstop to plug gaps in laws and
regulations.
• You need to look at:
--the pension law of the country
--duties that attach to the exercise of power
--duties of care
--strict legal fiduciary duty established by case law where relevant.

9. PRI, or “Principles of Responsible
Investment” and UNEP
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• Integrate ESG factors into investment decision-making in their
analysis of portfolio risks and returns.
• Governments may have a role role in guiding how governance and
fiduciary-type standards might evolve to include a consideration of
climate change and other ESG factors.
• UNEP, have just published a comprehensive report on the state of
fiduciary duties in the 21st Century which highlights some of the
progress being made in different jurisdictions.
1) is fiduciary duty a barrier to investors integrating ESG
factors since the FD is seen as excluding non-financial factors;
2) found that the FD should not be a barrier and may create a
positive duty to take ESG issues into account;
3) more clarification needed, including harmonisation of
legislation and an international statement or agreement on
the FD.

10. Need for More Work
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• The trend is increasingly towards reliance on behavioural and
governance standards, rather than quantitative limits, in guiding
prudent investment decision-making.
• For institutional investors, this means understanding the obligation
for prudence as encompassing a thorough understanding of the
range of opportunities and risks created by green finance and
climate change.
• But before we develop standards there is a need to do a stock taking
of the technical issues, availability of data, and what is reasonable
for agents of assets to be able to do.
• How do institutional investors and asset managers take account of
ESG factors? And how does this fit with case law in different
jurisdictions. The next level after UNEP.

11. Some Issues
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• How do trustees treat people retiring now versus people
retiring in 42 year. The former depend on short-term
returns, while the latter depend on long term returns.
How should a balance be achieved?
• Totale is a company that has oil, gas, refining and new
green energy. It is the second biggest investor in clean
energy in the world. Ditto for companies like Exxon.
• How should trustees think about this? What is best in
class investing and how should it be used in a fiduciary
capacity?

12. You can’t manage what you don’t measure
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• The global economy was built around carbon, and it is difficult to
diversify away from. In a study of 11,000 of the worlds largest
companies energy sector investment is 29% of the capital
expenditure of all GICS sectors—and green is very small. Utilities is
11% of the total, and carbon heavy materials is 11%. That’s 51% in all.
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US$, bn
Utilities Telecom. Services Information Technology
Healthcare Consumer Staples Consumer Discretionary
Industrials Materials Energy

13. Engagement versus Divestment
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• The divestment movement has a floor—it is an ethics
movement more than a path to less than 2 degrees.
• If you sell a share or a bond, you have to sell it to
someone else, and it has no effect on company finances.
• Does it make the stock less attractive? Not necessarily.
Big well diversified companies like Exxon have huge cash
profits each quarter. You drive up the effective dividend
yield for the new buyer in a zero rate world.
• More effective to engage.
• But if you are going to do this you need information.
Disclosure and modelling are key.

14. The FSB Disclosure Task Force
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• There are 10 members to start plus Michael Bloomberg
as chair.
• It will be expanded to 30.
• It is a follow up to the FSB “Enhanced Disclosure Task
Force (2012).
• Will aim for principles for voluntary disclosure.
• Is there moral hazard in asking industry to lead the
disclosure debate—problems hidden by banks are still
coming out from under the woodwork.