The extreme politics of investment management: How the fiduciary climate debate could kill
sGently, state politicians banded together to ban state and local government agencies from doing business with investment firms and banks accused of “boycotting” the firearms and fossil fuel industries and promoting climate change myths. While these policy interventions are touted as a move to protect investor returns, they instead have the unfortunate effect of eroding confidence in the fiduciary duty of investment management professionals. Such efforts lead to the politicization of investment management and a misunderstanding of the responsibility, judgment and competence of those charged with managing hard-earned assets for clients and pension plan beneficiaries.
In truth, exaggerating about waking investment managers only erodes belief in a highly regulated and highly trained industry — all in the name of earning political points fast.
This is particularly harmful as investment advisors must maintain a deep level of trust with clients as part of the fiduciary relationship. This duty is not affected by today’s news or passing fads. It is essential for all investment professionals. Of course, different advisors assess financial risks and opportunities based on client guidance and professional judgment – which is why portfolio holdings differ – but the primary obligation of a credit advisor has been and always will be the bottom line for investors. If politicians start drawing lines in the sand about the factors that advisers can and cannot take into account, it undermines the deep institutional knowledge that advisers rely on to make these decisions every day.
Investment managers are no strangers to dealing with multiple issues. From climate change to supply chains to shifting consumer preferences to corporate governance, there are many moving parts when assessing investment opportunities. ESG considerations are just one piece of the puzzle to consider. ESG Factors have been a part of the investment and business landscape for years. In fact, the CFA Institute, a global association of investment professionals that sets a standard for professional excellence and certification, 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 looking for the next hot topic to comment on, with little regard for the fiduciary process and research that led us to create the wallet in the modern age.
Those who politicize ESG investment decisions seem to forget that professional advisors have always been guided by a high code of ethics – as well as laws and regulations enforced by the US Securities and Exchange Commission and previous set by courts across the country. – That won’t go away any time soon. Any kind of political narrative that casts doubt on this long-established fiduciary tradition, whether it requires investment professionals to be all about climate accountability or outright bans such considerations, destroys faith in advisors’ ability to execute their fiduciary obligations wisely. Loyalty and care are their most important responsibility.
At the end of the day, investment managers’ personal opinions about addressing change do not go beyond what clients direct or what fiduciary duty requires. Rhetoric claiming otherwise or political decrees of a country setting conditions on the basis of which the fundamental investment factors of their country can be considered is quite dangerous. More importantly, it indicates that the ethics and morals of investment professionals can no longer be trusted. This intense 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 based on the alignment of political policy on climate change rather than company expertise, account soundness, investment skill and a return-tracking record, confidence in fiduciary duty is seriously compromised.
The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.
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