Socially Responsible Investment and Fiduciary Duties of Mutual Funds

In the investment context, the fiduciary duties are traditionally interpreted as ensuring the highest return on investment with the lowest possible risk for the beneficiaries. However, in the past two decades it became visible, that many beneficiaries of mutual funds demonstrated that they put a certain value on investment outcomes other than financial performance (those non-financial impacts include mainly environmental and social outcomes). This behaviour challenges canonically defined fiduciary duties for investments in instances when meeting the non-financial goals correlates negatively with the return. Consequently, it calls for the reinterpretation of the fiduciary duties of mutual funds and for finding appropriate tools for managing such extended obligations. In this chapter, we aim at building a rationale for an individual investor’s extended utility function that depends on return, risk and—additionally—non-financial characteristics of the investment. We also aim at establishing a stronger link between institutional and individual investment decisions through identifying the best practices adopted by mutual funds with respect to incorporating environmental, social and governance criteria in their investment decisions. In this way we contribute to improving fiduciary duties fulfilment in the modern pooled investment sector.