Pitfalls and Prospects of Sustainability Risk Management under the Modern Investors’ Fiduciary Duty.

Summary The compatibility of environmental, social and governance (ESG) risk management with the requirements of investors' fiduciary responsibilities (FR) in investment management is the key issue in the current context of rapid growth of sustainable investment strategies. This issue is therefore the subject of regulatory developments in Europe as well as recent lawsuits in the US. Despite these legal activities, investors still do not have a clear answer to this issue, leaving them inert to these new types of risks. We explore these recent developments in European and US legal practice to determine concretely to what extent FRs allow investors to take ESG risks into account in their investment decisions. We identify the materiality of ESG risks and the effectiveness of risk management actions as the fundamental elements for defining the fiduciary responsibility of investors to manage ESG risks. We develop a theoretical representation of the concept of materiality under the constraints of FRs and identify that in this legal framework ESG risks are equated with financial risks. their management is therefore only required if they financially affect investments. We also demonstrate that the FRs require the management of long term ESG risks, if they are sufficiently material given the applied discount rate, and formulate a discounting principle consistent with the FRs. Then, through the case study of a recent US litigation, we establish that risk aversion in qualifying the effectiveness of ESG risk management actions could hinder efficient risk management by inducing investors not to manage material ESG risk.