Is There a Fiduciary Duty to Destroy the Climate?

The Maximization Model and its Devastating Impact

A chilling question was raised at a recent Columbia Law School colloquium: does corporate fiduciary duty clash with the urgent reality of the climate emergency? Unfortunately, the dominant "Maximization Model" of fiduciary duty, prevalent in the US, dictates prioritizing profit, even at the expense of the planet.

This model compels corporate leaders and institutional investors to relentlessly pursue profit through activities that exacerbate climate change, like fossil fuel production and deforestation. It's a system where short-term financial gains trump long-term planetary health.

Glimmers of Hope: Alternative Approaches to Fiduciary Duty

While the Maximization Model reigns supreme in many jurisdictions, alternative approaches offer glimmers of hope. Canada, for instance, explicitly includes "the environment" in its national corporate fiduciary duty, recognizing the interconnectedness of business and ecological well-being.

Similarly, the UK's corporate fiduciary statute considers environmental factors. A recent lawsuit against Shell, though dismissed on procedural grounds, highlighted the potential for holding companies accountable for their climate pledges under such statutes. Even in the US, some states have "constituency statutes" expanding fiduciary duties beyond shareholders, though Delaware, a key player in corporate law, has yet to follow suit.

The Netherlands stands out with its courts mandating consideration of climate risks in fiduciary decisions. A landmark ruling against Shell demonstrated the power of the judiciary to enforce climate responsibility, even against corporate giants.

Challenges and the Entrenched Power of the Maximization Model

Despite these promising developments, the Maximization Model remains deeply entrenched, reinforced by a "corporate governance machine" that prioritizes shareholder profit above all else. This mindset permeates business schools and law schools, shaping the values of future business leaders.

Institutional investors, driven by a narrow focus on financial returns, further complicate matters. Even if corporate boards prioritize climate action, investors may demand profit maximization, threatening activist campaigns or hostile takeovers.

The influence of powerful corporations on the political system further undermines efforts to regulate climate-damaging activities. Milton Friedman's influential model, which advocates for government regulation of externalities like pollution while prioritizing profit, overlooks the reality of corporate lobbying and political capture.

“A machine is autonomous, defined by its own internal operations, self-regulating, and self-propelling. Step back a bit, though, and what looks like a marvel begins to seem monstrous.” - James Gleick

A Call for Reform: Prioritizing Planetary Health

To avert a climate catastrophe, we need a paradigm shift in our understanding of fiduciary duty. We must move beyond the narrow confines of profit maximization and embrace a more holistic approach that considers the long-term well-being of both shareholders and the planet.

This requires a multi-pronged strategy:

• Stop teaching the Maximization Model as an immutable truth. Fiduciary duties have a longer history than Friedman’s shareholder primacy, and must encompass more than pecuniary wealth.
• Enact laws that prioritize climate considerations in business decisions, empowering corporate boards and institutional investors to take meaningful climate action.
• Promote international cooperation to establish climate-focused fiduciary standards, ensuring that businesses worldwide prioritize sustainability.

“There is no polite way to say business is destroying the world.” - Paul Hawken

The time for polite conversation is over. We have a moral and fiduciary duty to protect our planet. Reforming fiduciary duty is not just a legal imperative, it's a matter of survival.