CFA Institute Views on Fiduciary Duty in the Context of Net-Zero Investing

In this position paper, CFA Institute addresses one of the more vexing questions in the debate about net-zero investing — namely, is it consistent with fiduciary duty? More specifically, is integrating net-zero factors into a traditional, fundamental, investment process somehow prohibited, permitted, or required by fiduciary duty? This issue has been the subject of much debate across the financial, legal, and political spectrums, and to date, no single, unifying answer has emerged.

“CFA Institute Views on Fiduciary Duty in the Context of Net-Zero Investing” aims to help further shape the discussion. CFA Institute sets forth its high-level views on fiduciary duty in the context of net-zero investing. In our role as a financial educator, a policy thought leader, and a professional membership organization, our views are informed by industry practitioners, policymakers and regulators, asset owners, and other stakeholders — virtually all aspects of the investment management industry.

CFA Institute defines net-zero investing as aiming to reduce net greenhouse gas emissions to zero through a combination of emission reductions and removals. Net-zero investing includes four key goals: meeting financial return and risk targets; managing the financial risks associated with climate change; capitalizing on long-term opportunities created by climate change; and working toward achieving net-zero objectives in line with the first three goals. Some investors view net-zero as beneficial beyond financial returns, while others focus solely on its financial aspects.

In June 2024, we set forth our approach to net-zero investing, emphasizing that the issue of net-zero investing is complicated and involves many facets of the investment industry. And as we stated in our Net Zero in the Balance report, while there is no single globally consistent interpretation of fiduciary duty, two key concepts are widely followed that we firmly support: “loyalty” (putting the interests of clients first, free from conflicts of interest) and “prudence and care” (making informed, well-considered investment decisions and diversifying investments). While fiduciary duty traditionally focuses on financial risk and return, it is increasingly expanding in some regions to include the broader societal and environmental impacts of investments.

CFA Institute Views

Our top-line views on fiduciary duty in the context of net-zero investing include:

• At its core, a fiduciary is expected to balance risks and returns to achieve maximum financial benefit within certain risk parameters.
• In balancing these risks and returns, a fiduciary is expected to consider all factors that are financially material to the investment decision.
• In doing so, fiduciaries should recall that there is a wider system — the economic and financial system — within which investment decisions are made.
• In carrying out their duties, particularly in assessing what material risks to consider, fiduciaries can assess whether net-zero investing aids in mitigating long-term risks associated with climate change, such as physical damage to assets, business profits, transition risks depending on public policy responses, regulatory changes, and market shifts.
• Within the wider economic and financial system, fiduciaries who consider climate issues (which underpin net-zero investing) do so to improve returns and reduce risks.
• In some instances, it may be appropriate for fiduciaries to consider an investment strategy that rejects short-term gains if taking those gains creates identifiable risks to the longer-term sustainability of investment returns.
• Once an investment decision is made (with or without net-zero considerations in mind), fiduciaries should consider whether they can improve an investment’s return or lower its risk by engaging in stewardship activities.

CFA Institute emphasizes the importance of education, collaboration, and research in helping the investment profession manage the financial risks and opportunities tied to climate change. The organization aims to build knowledge and tools for understanding net-zero investing and fiduciary duty while advocating for policies that support responsible investing.