Financial Advisors

The Extreme Politics of Investment Management: How the Climate Debate May Kill Fiduciary Duty

Recently, state politicians have joined together to ban state and local government agencies from doing business with investment and banking firms accused of “boycotting” the firearm and fossil fuel industry and peddling climate change myths. While these political interventions are touted as a move to protect investor returns, they instead have the unfortunate effect of diminishing trust in the fiduciary duty of investment management professionals. Efforts like this politicize investment management and willfully misconstrue the responsibility, judgment and competency of those entrusted to manage the hard-earned assets of clients and retirement plan beneficiaries.

In truth, the hyperbole around woke investment managers only serves to erode faith in a highly regulated, highly trained industry – all in the name of winning quick political points.

This is especially harmful as investment advisors must maintain a deep level of trust with clients as part of the fiduciary relationship. This duty is not swayed by the news of the day or passing fads. It is core to all investment professionals. Of course, different advisors evaluate financial risks and opportunities based on client direction and professional judgement – its why portfolio holdings look different – but the fiduciary adviser’s fundamental obligation has been and always will be their investors’ bottom lines. If politicians begin to draw lines in the sand about what factors can and can’t be considered by advisors, it undermines the deep institutional knowledge that advisers draw on to make those decisions each day.

Investment managers are no strangers to juggling multiple issues. From climate change to supply chains to shifting consumer preferences to corporate governance, there are many moving parts when evaluating investment opportunities. ESG considerations are just one piece of the puzzle to factor in. ESG factors have been a part of the investment and business landscape for years. In fact, CFA Institute, the global association of investment professionals that sets the standard for professional excellence and credentials, has been commenting on the topic and advising professionals on how to consider ESG factors as part of rigorous financial analysis for decades.

Only recently has consideration of climate change become a political football for lawmakers who are looking for the next hot topic to comment on, with little regard for the fiduciary process and research that has led us to modern day portfolio construction.

Those who are politicizing ESG investing decisions seemingly forget that professional advisors have always been guided by a high ethical code – in addition to laws, regulations imposed by the U.S. Securities and Exchange Commission and precedent set by the courts across the nation. – that will not go away any time soon. Any type of political narrative that casts suspicion on this time-honored fiduciary tradition, whether it’s demanding investment professionals to be all-in for climate accountability or completely banning such considerations, destroys faith in the ability of advisors to carry out their fiduciary obligations of prudence, loyalty and care, their most critical responsibility.

At the end of the day, the personal opinions of investment managers on addressing change do not override what clients direct or what fiduciary duty requires. Rhetoric claiming otherwise or state-based political decrees placing conditions on which fundamental investment factors can be considered in their state is downright dangerous. Most importantly, it suggests that the ethics and morals of their investment professionals can no longer be trusted. This extreme effort to politicize the investment management industry threatens ethical practice, conflict of interest duties, professionalism and ultimately, retirement security. If investment firms and professionals are judged on political policy alignment on climate change rather than firm experience, account safety, investment skill and return track record, trust in fiduciary duty is at severe risk.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Paul Andrews

Paul Andrews is Managing Director for Research, Advocacy, & Standards for CFA Institute. Paul is also a current member of the CFA Institute Systemic Risk Council. Previously he was Secretary General of the International Organization of Securities Commissions (IOSCO) where he served two terms.

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