Responsible Investment, Human Rights and Climate Change

Kathleen Mahoney

Law Department - Faculty of Law - University of Calgary - ِAlberta - Canada

Abstract

The investment world has the potential to be a force for good, but only if asset owners and their managers make investment decisions in a sustainable and responsible way. By pursuing short-term profit above other considerations, the investment system creates risks of horrific human rights violations such as forced labor and human trafficking, as well as the massive human rights and other risks associated with climate change. The traditional view of pension managers and other institutional investors, however, is that they have a duty to make investment decisions that can be quantified in terms of short term, material risks. They say their fiduciary duty prevents them from considering environmental, social and governance factors (ESG) in their investment decisions. This paper will challenge that view. While for most people and corporations, their investment goals are to make money, not to save the world, responsible investing cuts both ways. It is not only about doing the right thing from a moral standpoint. Increasingly, responsible and sustainable investment has proven to be in the investor’s own financial interest. The paper will further argue that because of the upside of responsible and sustainable investments, investment advisors have a fiduciary duty to their beneficiaries to account fully in its decisions for the risks and opportunities posed by the climate crisis and adherence to human rights standards. As the outgoing Governor of the Bank of England, Mark Carney puts it, “Companies that don't adapt to the low carbon economy- including companies in the financial system – will go bankrupt without question. But there will be great fortunes made long this path aligned with what society wants.” Taking into account ESG considerations enables investors to identify new sets of financially material risks and opportunities. Investors who consider ESG criteria have a deeper understanding of a company’s operations, as their due diligence process takes into account a wider range of information. This allows investors to better manage the significant financial risks linked to human rights violations and climate change, including potential impact on the reputation and brand of a company, with repercussions on sales, and legal sanctions on companies and their suppliers. To support the argument, the paper will present a case study of the Quebec pension fund (CDPQ) and its investment strategies which integrated ESG factors into its decision making by placing the climate crisis at the centre of its investment process. I will describe the ambitious targets it used to increase investment in low-carbon assets and the strategies they adopted for achieving those targets. I will discuss how the CDPQ has played a leadership role in the institutional investment community by demonstrating how pension funds can be managed to meet long-term obligations to present and future beneficiaries in the face of the anticipated massive disruptions that will result from climate change. The Quebec pension fund’s investment strategy demonstrates that it not only contributes to minimising risk, but comes with many investment opportunities by being ahead of the curve. The paper concludes that widely used interpretations of fiduciary duty and materiality are out of step with the reality of climate change, human rights violations and their financial implications and should be re-thought or clarified. Evolving sustainability principles and international best practices increasingly require such considerations.

Keywords

"Human Rights", "Climate Change", "Investment"