This paper is part of C2ES’ Finance and Net Zero Transition: Thematic Briefs series.

Fiduciary duty, the obligation to act in the best interest of beneficiaries, is being reshaped by the realities of climate risk. Once narrowly focused on short-term returns, it is now evolving to include long-term systemic risks, such as environmental and social factors. This shift reflects growing recognition that climate change materially threatens both portfolio performance and the broader financial system. Leading asset owners worldwide are embedding climate transition planning into investment oversight, reframing climate stewardship as essential rather than optional to prudent fiduciary practice.

Highlights

The historical evolution of fiduciary duty. Grounded in loyalty, prudence, and care, fiduciary duty is shifting from shortterm financial metrics to long-term systemic risks like climate change. U.S. interpretations still trail the EU, but momentum is building.

The limits of Modern Portfolio Theory (MPT). MPT fails to account for how investments shape and are shaped by real-world systems. It treats climate risk as background volatility rather than a core risk factor, an outdated view in today’s interdependent financial landscape.

The emergence of universal ownership and systemic risk awareness. Large institutional investors are effectively “universal owners” with exposure to the entire economy. They cannot diversify away from climate risk and must manage it directly to protect long-term returns and the broader financial system.

Concrete case studies from leading asset owners. Case studies of leading practices from CalSTRS, the New York City Comptroller, WSIB, UPP, Border to Coast, and La Caisse show how robust transition strategies and targeted stewardship advance climate action as part of fiduciary duty.

Legal and regulatory shifts reinforcing climate integration. From ERISA reforms in the U.S. to SFDR and TCFD mandates in Europe and the UK, laws are increasingly requiring fiduciaries to account for climate-related risk. UN, European, and UK regulators have signaled that ignoring climate risk may violate fiduciary duty, while U.S. guidance remains less explicit.