Does the Fiduciary Duty of the 21st Century Need to Include Sustainability?

By Heiner Burkard

The fiduciary duty is the obligation of asset managers who invest on behalf of others to act in the best interest of their clients. The core paradigm has always been to maximise their returns while respecting the risk they are willing to take. In recent years, a major inflow of capital has been directed into sustainable investing. Yet, at least since the inauguration of the Trump administration, the sustainable investing space has witnessed a growing backlash.

As of 2025, asset management companies managed USD 139 trillion globally. This is more than the entire global gross domestic product (GDP) of roughly USD 117 trillion in 2025. These companies do not directly own these assets, but invest on behalf of their clients. They act as fiduciaries and must put their clients’ interests ahead of their own. This is called the fiduciary duty, legally requiring them to manage the assets for the benefit of their clients, also called beneficiaries. The ethical and legal relationship of trust between an asset manager and the asset owner requires financial advisors to act not only to the benefit of the client, but also with the highest loyalty, honesty and care to protect the beneficiary’s interest and property.

Many of the world’s largest asset managers are institutional investors. They include pension funds, which invest the retirement savings of workers and retirees to fund future pension payments, as well as sovereign wealth funds, investing a nation’s savings on behalf of all citizens. Norway’s pension fund is the largest state fund globally, with almost two trillion USD in assets under management, and it invests in more than 8,700 companies worldwide. In the Netherlands, the largest institutional investors are APG, which invests the Dutch civil servants’ pension savings, and PGGM, investing the pension savings of all healthcare workers in the Netherlands.

For decades, institutional investors understood their fiduciary duty as the obligation to generate reasonable financial returns for their beneficiaries at an acceptable level of risk. Anything else was often considered outside of their mandate and potentially harming this objective. Therefore, the goal was to maximise returns without risking significant losses to their clients. This approach is rooted in the legal assumption that investors are well-informed and act prudently. The core claim is that they interpret their duty according to what such a prudent investor would do, which is said to seek the best financial return at a given risk appetite.

With growing interest in sustainability, environmental, social and governance considerations as well as responsible investing gained traction. According to a recent survey, 88 per cent of investors are interested in portfolios that integrate sustainability. At the same time, low-carbon private investments alone grew by 123 per cent in five years, more than double the growth rate of public markets. These numbers show a genuine interest, especially from private investors, in investing in a sustainable way. And yet, the financial sector still witnessed a backlash against ESG and sustainability more recently. This is partially fueled by the second Trump administration, portraying diversity, equity, and inclusion (DEI), and ESG concerns as an evil agenda pushed by the anti-capitalist woke left. Andreas Utermann, who was the CEO and Co-Head of Allianz Global Investors, claims in the Financial Times that it is also rooted in three fundamental flaws. According to him, pressuring investment advisors to prioritise investments for reasons beyond their risk-return profile would conflict with their fiduciary obligation. Focusing only on sustainable investments reduces the number of available options and thus hinders the possibility of diversification, making it harder to spread risk effectively and ultimately threatens the main objective and duty of return maximisation. Additionally, the author argues that investment advisors should focus on what they can do best, assessing investment opportunities solely on their financial fundamentals. He states: "Directing capital into sectors that would not see healthy flows based on their fundamental [financial parameters] risks these sectors becoming overvalued".  According to him, this would lead to underperformance and a loss of value of these assets. He further argues that “policy makers should focus on setting taxes and regulations to deal with externalities [in order to leave] the financial sector free to do the job it does best” and that it is "not the role of investment firms to 'educate' clients on moral values". Utermann’s argument resonates with many investment advisors who advocate for a singular understanding of the fiduciary duty.

Scientific consensus and real-life examples tell a different story. Not only is it widely accepted that long-term investors cannot ignore sustainability considerations from a risk perspective, but the Task Force on Climate-related Financial Disclosures, the European Central Bank, the Bank of England, and the Intergovernmental Panel on Climate Change all concluded, backed by unambiguous scientific proof, that climate change and other sustainability concerns pose material financial risks assets across all sectors. This is now widely accepted by regulators, central banks, financial institutions and institutional investors. Specifically, physical risks generated by extreme weather events like heat waves or floods pose immediate and significant threats. In 2016, a landmark study already showed that climate change is not a distant or abstract risk for a firm’s financial performance or an investor’s returns, but directly translates into measurable destruction of financial value. While the expected losses for investors are already significant, worst-case scenarios in which climate change accelerates are catastrophic for investors, with nearly a quarter of all global financial asset value being wiped out due to global warming. Threats posed by climate change are therefore not sectoral but systemic, affecting the entire universe of investable assets and making diversification an insufficient response. Therefore, investors who price financial assets without accounting for climate risks are systematically misjudging those assets, which is a fundamental market failure with implications for investors globally. Furthermore, reports from governmental organisations and banks show that even when investors do not have preferences towards sustainability whatsoever, long-term investors still need to account for risks related to sustainability and climate change in order to fully understand the fundamental value of an asset. Ignoring them can lead to an incorrect assessment of the financial risk of an asset and jeopardise returns. Investment advisors, who must act in the best interest of their clients and generate optimal returns, still need to consider sustainability in their investment decisions. This may then only encompass risks stemming from sustainability concerns such as climate change, but nevertheless this shows without a doubt that sustainability topics cannot be ignored. In light of this, Utermann’s argument that sustainability considerations in investment decisions breach the fiduciary duty and that ESG investing overvalues certain sectors and disguises the true value of assets appears implausible. In fact, ignoring risks stemming from climate change and other sustainability concerns actually harms the risk-adjusted returns of long-term investments.  Hence, asset managers who ignore these risks no longer act in the best interest of their clients. In addition, Utermann states that if policymakers concentrate on policies to internalise unintended consequences from economic activities such as pollution, financial sector participants are free to do “what they can do best” and should not educate their clients. Yet, for asset managers and institutional investors, doing “what they do best” means accurately evaluating the full risk-return profile, and ignoring sustainability risks makes that impossible. 

Lastly, the call for investment professionals not to “educate” their clients or impose moral values upon them is redundant in light of how the mandates of the “best interest” of clients are made. Institutional investors such as pension funds typically assume that their participants only care about financial returns and pension savings, hence presupposing that they do not have preferences on sustainability topics whatsoever. Even if this were the case, the aforementioned arguments suggest that ignoring ESG issues entirely constitutes a neglect of their fiduciary duty. Yet, these assumptions are rarely checked. A rigorous empirical study on pension fund participants’ preferences on sustainable investing showed that two-thirds of participants actually supported greater engagement with companies based on selected Sustainable Development Goals (SDGs), whereas only roughly ten per cent were against. Around 75 per cent also favoured portfolio screening based on SDGs, with support holding even when participants did not expect it to pay off financially and even when the fund actually implemented this choice. This has significant implications. In fact, it directly contradicts the traditional assumption of the fiduciary duty, according to which participants only care about return maximisation. Taken together, these findings suggest that pension funds ignoring participants’ sustainability preferences may actually breach their fiduciary duty to act in their members’ best interest.

Regardless of the current backlash against ESG and the debate about the meaningfulness of including sustainability in investment decisions, economists and financial practitioners recognise such issues as risk factors that not only potentially threaten the value of assets in the future, but also interrupt value chains, impact the supply and demand of specific products and services, and ultimately damage financial assets and diminish returns. To generate the best returns for their clients, investment professionals can no longer ignore sustainability considerations, at least from a risk perspective. A modern fiduciary duty, even when interpreted as merely optimising the return, consequently needs to include sustainability. But the conventional interpretation is based upon unchecked and unchallenged assumptions that seem not to hold in reality. Investment advisors traditionally never asked their clients or participants what they defined as their best interest. Only through asking for their mandate and a definition of “best interest” that is formed through surveys, votes, and informed consent, asset managers and other institutional investors can actually claim to know what this best interest is. A modern fiduciary duty can no longer just assume unchallenged characteristics about the beneficiaries and needs to respect actually expressed preferences. 

Sources: Financial Times, Oxford University Press, European Central Bank, Springer Nature

Written by Heiner Burkard

Editted by Sarah Valkenburg and Gabrielle Ludes