Call of the Hero: Fiduciary duty

Get excited about fiduciary duty as a key to long-term climate security

At Bank of Nature, we say “fiduciaries can be the heroes of the climate crisis.”

Translation?

There are people right now in charge of vastly rich monetary funds who have both the capacity and the obligation to respond to the human-made, planet-scale climate crisis — but don’t yet. They can literally pay for a fix.

Activating these heroes is the opportunity we see at Bank of Nature. Understanding what they do, and what they ought to do, is the focus of this three-part interview I did with financial philosopher Tim MacDonald, who is cofounder of Bank of Nature with me.

• Part 1 is The Call of the Hero (fiduciary duty).

• Part 2 is The Hero’s Superpower (fiduciary finance).

• Part 3 is The Hero’s Quest (stewardship).

Creating a new channel for fiduciaries to play a right-sized role in climate leadership is the Bank of Nature mechanism for new climate action. It’s doable and doable without a big overhaul in how things work without it. Let’s talk about it.

The Call of the Hero: Fiduciary duty

Many people of retirement age — in Western European societies, especially — have pensions into which they have invested over the course of their working life. Globally, pension funds are worth tens of trillions. Others will know the wealth of university endowments and foundations.

Pension funds, endowments and other aggregated savings that are managed by a third party called a fiduciary comprise the category of fiduciary money. That translates as Really Big Money.

Fiduciary duty is the obligation of the fiduciaries to maintain the financial health of entrusted fiduciary money forever by meeting minimum rates of return. That means fiduciaries, as certified professionals in finance, control Really Big Money that shapes the economy and our future through their investment choices today.

What are they doing with their money? How are they supporting the future of their current beneficiaries in the fiduciaries’ choices of investment today?

Ian Edwards: Hi Tim. Fiduciaries are guided by missions like “fiduciary duty” and “stewardship” — terms that Bank of Nature argues are not fully executed in supporting their future beneficiaries. Does fiduciary duty today extend to beneficiaries living in a future climate-changed world? 

Tim MacDonald: Yes. The duties of pension fiduciaries, for example, are intergenerational. They have to write monthly checks to eligible retirees this month, next month, the month after that and so on, for as long as there are retirees entitled to the benefit. This population of retirees is constantly changing as current workers retire, current retirees pass away and new hires enter the plan. So, the duty of a pension fiduciary is to be there now and in a future that has no end.

Even if that future is climate-changed, the duty to pay benefits remains unchanged.

IE: That’s a zinger worth repeating: “Even if that future is climate-changed, the duty to pay benefits remains unchanged.” What’s in the way of them fulfilling their fiduciary duty to beneficiaries in the future?

TM: To start with, fiduciaries today hand over all the fiduciary money that society has entrusted to their good judgement to the best asset managers they can find. “Best” here is determined through peer benchmarking all asset managers against each other on the basis of growth in net asset value. These competing and arms-length asset managers gamble their clients’ vast fiduciary money through markets that set prices for various financial assets traded in those markets.

Once fiduciaries accept that the only way they can put money to work in the economy is indirectly and derivatively through proxies like asset managers, they give up any power to influence better outcomes for the future. It’s not the only way, as we argue at Bank of Nature. There is a better way.

That said, fiduciaries are buying and selling stocks on price shifts. They aren’t affecting change in how the companies behind those stocks are building the economy and future. Their untapped power, as we see in fiduciary finance, is in negotiating directly with these enterprises in ways that secure both the financial minimums and a better climate future for beneficiaries in 10, 20, 30, 60 years. Instead, of using this untapped power, they are in the markets in which they just have to take whatever the markets give them, day to day, and hope that will be enough.

Betting on the markets, and hoping that bet will pay off, is not the way to deliver income security in the future to your future beneficiaries grappling with climate insecurity.  

IE: So, does that mean fiduciaries job out the responsibility of meeting their financial minimums to middle persons that have no obligation to the retirees affected by these speculative investments? Are fiduciaries not in charge of their own funds? Is it fair to generalize?

TM: The answer to your first question, sadly, is yes. This started in 1972, when the law of fiduciary duty was changed to allow institutional fiduciaries of pensions and endowments to speculate in the markets. Before 1972, this investment strategy was illegal. After 1972, fiduciaries hired experts — asset managers — who anticipate movements in stock prices to manage portfolios for them.

It’s evolved over the subsequent 50 years to be this: Fiduciaries accept the identity of asset owners pushed on them by asset managers, who say fiduciaries only meet fiduciary duty by allocating their holdings to third-party asset managers. That is not what the law actually says. There is no legal imperative to hand over control to a third party. It’s just generally done.

The “assets" we are taking about here comprise fiduciary money, and the fiduciary responsibility that is attached to fiduciary money, to keep the pension or endowment ongoing and able to pay future benefits to future beneficiaries.

So, we have today this situation in which fiduciaries give over control of which enterprises get financed with fiduciary money, and on what terms, to asset managers who are not, themselves financing the values of prudent stewardship. Asset managers try to “maximize returns”, which means extracting as much profit as they can from trading in the markets. So, we have this very long chain of managers managing managers managing managers managing managers, none of whom are burdened by any fiduciary duties of prudent stewardship.

This has grave consequences in how our economy works and how our future is being defined.

IE: That is very definition of “pass the buck.” Do global pandemics like the climate threat or COVID affect the outlook for the value of fiduciary funds? Why isn’t that relevant in how fiduciaries approve investments made on their behalf?

TM: Yes, of course they do. You tell the story best yourself when you invite people to imagine themselves as twenty-somethings taking a job with a government agency where a big part of the compensation package is the promise that, when they retire, they will get a pension that guarantees income security in a dignified retirement.

Now, fast-forward 30+ years. The climate projections are not good. Are your Golden Years lived out in a dystopian future of catastrophic climate change, with the cascading problems of food insecurity, population migrations and erosion of civilized society? Now, imagine learning that your very own pension contributed to the financing of this horrific outcome when your fiduciaries handed their money to asset managers who made a lot of money betting on, say, fossilized hydrocarbon extraction. 

Would you think your pension had done a very good job of being a steward of your income security in your retirement?

IE: Clearly not, but that’s hindsight. As we know, the future isn’t written. As we see in today’s mindset, people typically choose value-making now over any of the negative externalities that dim an uncertain future. That seems to be a moral argument that has no compelling impact on choice even with the compounding threat of overlapping global pandemics. How do we inject future value into today’s value-making?

TM: We have to update our collective common sense of fiduciary prudence for these big shared funds redeemed far in the future. Speculation on future movements in market-clearing prices is not a strategy to make a better future.

The future movements they are speculating on are, of course, growth and future selling prices. Fiduciary money is not created to finance growth. It is created to finance “being there in the future”.  Speculation is self-interested, by design. Fiduciary money is future-interested, also by design. These two are not the same. They do not really fit. 

It has to change. We have to engage with fiduciary money about its powers of size, purpose, time and technology to negotiate, as we say at Bank of Nature, “A good Anthropocene.”

IE: “Prudence” is an old-fashioned word that is under-used in the mainstream as a foundational tenet in investing for other people. For readers, this is what Investopedia says:

A prudent investment refers to the recognized use of financial assets that are suitable for an investor's goals and objectives. A prudent investment considers the risk/return profile and the time horizon of an investor.

Do today’s fiduciaries feel trapped by a system of finance that is not aligned with a fuller definition of fiduciary duty? Do they feel “imprudent” or “disloyal”?

TM: This is the $64,000 question, and we are going to need to do some research to really find out. My anecdotal evidence is that these professionals take their fiduciary duties seriously. They feel, authentically, that their duty is to provide for the future for their beneficiaries. So, I am confident we will find a certain degree of discomfort in the business right now with how they are putting what we are calling fiduciary money to work through speculation on Wall Street. However, they probably also feel like they really do not have any other alternatives to choose from. “Trapped” is not likely the word they would use to describe how they feel, but I believe there is a lot of pent-up frustration and anxiety with the popular narrative that says they are just glorified purchasing managers whose fiduciary “duty” is to hire the best asset managers their fiduciary money can buy.

IE: This gets to the crux of the hero-who-isn’t-yet-a-hero potential. With all that money to influence a future that could be better for beneficiaries now and generations from now, fiduciaries could indeed pay for climate security. Instead, they leave it to speculators to make present profits at the expense of the future quality of life. Imagine if fiduciaries took back their power guided by the support for future beneficiaries. How does that change their role?

TM: In a recent interview, science fiction writer Kim Stanley Robinson, author of The Ministry for the Future, talks about "the story of getting to a new and better social system, that’s almost an empty niche in our mental ecology”.  Imagining fiduciaries for the future takes us, I think, into that empty niche, and begins to write that story of getting to a new and better social system.  As you say, pensions and endowments have the mission, the duty and the scale to act at the scale of climate. When I survey the ecology (to use KSR’s word) of social structures for social decision making, I see pensions and endowments - fiduciary money - as the ONLY social structure for social decision-making today that has that magic combination of mission, duty and scale. You talk about a Third Way to climate security, and real endgame sustainability, because the two conventional ways of government and industry both come up short when measured against this three-part metric of mission, duty and scale. Governments don’t have the scale; they are limited by national self interest, which all too often gets co-opted by special interests. Industry, which in modern times pretty much means the corporation, doesn’t have the mission or the duty. Much well-intentioned energy is being invested by the ESG movement, especially, to infuse corporations with a sensibility, if not a mission that rises to the level of a duty, and to act on climate at the scale of climate. That’s a miss. I don’t see that ever really being successful, but there is no clarity on that because various forms of greenwashing do such a good job of creating an appearance of movement towards that new way of being that is really just an illusion.

Consider, for example, The Word Economic Forum report Global Risks 2022, in which the world’s reigning experts on managing global economic transitions basically admit they do not have the expertise required to manage an orderly transition to Climate Security. Fiduciary money can and should become the new experts we need for executing an ORDERLY transition. It has the mission to be there in the future, it has the duty to make it a good future and it has the scale to act at climate scale, unconstrained by national boundaries or misaligned institutional priorities. It also has this untapped power to negotiate that Bank of Nature is trying to show them and the world. Once they take up that power to negotiate, that becomes their new role in the global economy: chief negotiator for a better future, for themselves, for their beneficiaries and, by extension, for all of society and each of us. And once they do take on that mantle, of chief negotiator for a better world, that unlocks our personal agency, as individuals, to participate in shaping that common sense of reasonable people enshrined in the law of fiduciary duty. We all get to have our say on who or what fiduciary money can and should be negotiating with and why.  That consensus becomes the law. That, I think, gets us to the “new and better social system” that KSR tells us we need right now.

For readers, you can connect with Bank of Nature here. We welcome comments, challenges, questions and improvements. Bank of Nature is a design initiative that explores the potential for a proxy for nature as a way to remake our economy and future to enhance our future threatened by climate inaction. Fiduciary money is an existing, ample way to pay for climate action.