Fiduciary Duty Is Being Stress-Tested—Systemic Stewardship May Be the Answer

Fiduciary duty has long been treated as the bedrock of asset ownership: act prudently, act loyally, and maximise long-term, risk-adjusted returns for beneficiaries.

Simple. Stable. Defensible.

Until now.

Because the world that definition was built for no longer exists.

Climate shocks are redrawing economic maps. Supply chains are fragmenting under geopolitical strain. Social inequality is fuelling political instability. These are not abstract “ESG issues.” They are systemic forces shaping market returns.

And they expose a growing tension at the heart of investment governance:
Can asset owners fulfil their fiduciary duty without engaging in systemic stewardship?

The Illusion of Diversification

Large asset owners—pension funds, sovereign wealth funds, insurers—are, in reality, universal owners. Their portfolios span entire economies. That brings a hard truth:

You can diversify away idiosyncratic risk.
You cannot diversify away systemic failure.

If climate change wipes 10–20% off global GDP by mid-century—as many estimates suggest—every asset class feels it. If governance failures destabilise markets, correlations converge. If social breakdown undermines economic participation, long-term growth erodes.

In that world, traditional fiduciary practice—optimising individual securities—starts to look like rearranging the deck chairs.

The real driver of returns is no longer just alpha. It is beta stability.
And beta is shaped by the health of the system itself.

From Stock Picking to System Stewardship

This is where systemic stewardship enters the frame.

At its core, it asks asset owners to move beyond company-by-company engagement and instead:

• Influence market standards

• Support policy frameworks

• Collaborate to address shared risks

Critics often frame this as mission creep—as fiduciaries straying into politics or activism.

But that critique misses the point.

Systemic stewardship is not about expressing values. It is about protecting long-term returns in a system where risks are interconnected and unavoidable.

Or put more bluntly:
If systemic risks determine portfolio outcomes, ignoring them is not neutrality—it is negligence.

Why the Industry Still Hesitates

Despite this logic, many asset owners remain cautious.

The reasons are understandable.

First, legal ambiguity persists. Fiduciary duty is well established; systemic stewardship is not. Trustees worry—reasonably—about overstepping mandates, particularly when engagement edges into public policy.

Second, the incentives are broken. Stewardship is costly and slow. Its benefits are diffuse. Why should one fund invest heavily in climate engagement when competitors can free-ride on the outcome?

Third, measurement remains imperfect. Financial markets run on data, yet the impact of systemic interventions—avoided climate damage, improved governance norms—is notoriously hard to quantify.

Finally, governance structures lag reality. Even long-term investors operate within short-term reporting cycles and political constraints. Systemic stewardship demands patience that institutions do not always reward.

The Ground Is Already Shifting

Yet, quietly, the direction of travel is changing.

Regulators are raising expectations. The UK Financial Reporting Council Stewardship Code now emphasises outcomes over intent. Legal opinions increasingly affirm that ESG factors are financially material—and therefore squarely within fiduciary scope.

Investor coalitions are scaling. Initiatives like Climate Action 100+, representing tens of trillions in assets, have demonstrated that coordinated engagement can shift corporate behaviour on a global scale.

And leading institutions are moving first.

Federated Hermes and the Case for Alignment

Among asset managers, Federated Hermes has been particularly explicit: stewardship and fiduciary duty are not in conflict—they are interdependent.

Through its EOS platform, the firm engages with more than 1,000 companies annually, covering over $1 trillion in assets under advice. But scale is only part of the story.

More telling is the evolution of its approach:

• Structured escalation when engagement stalls

• Active participation in shaping policy and disclosure standards

• System-level framing of risks such as climate and human capital

Crucially, Federated Hermes ties these activities directly to financial outcomes: risk mitigation, market stability, and long-term value creation.

This is not stewardship as a compliance exercise. It is stewardship as system management.

A Broader Shift Among Asset Owners

The same logic is visible among leading asset owners.

The UK’s Universities Superannuation Scheme is embedding climate scenarios into investment strategy.
APG Asset Management integrates sustainability into capital allocation and policy engagement.
Norges Bank Investment Management uses its scale to set expectations on governance and environmental standards globally.

These are not outliers. They are early indicators of a broader shift:
fiduciary duty is being interpreted through a systemic lens.

The Real Question Isn’t “Can We?”—It’s “Must We?”

The debate is often framed in cautious terms:
Is systemic stewardship permissible under fiduciary duty?

That framing is already outdated.

A more relevant question is emerging:
Can fiduciaries justify inaction in the face of systemic risk?

Because inaction is not neutral. It is a decision—a bet that systemic threats will not materially affect long-term returns.

Given the evidence, that is an increasingly uncomfortable bet to defend.

Conclusion: From Optional to Essential

Systemic stewardship does not replace fiduciary duty. It redefines how it is delivered.

In a world where systemic risks dominate market outcomes:

• Protecting portfolios requires protecting the system

• Stewardship must extend beyond individual holdings

• Long-term value depends on collective action

The shift will not be easy. Legal clarity will lag. Metrics will remain imperfect. Incentives will need to evolve.

But the direction is clear.

Fiduciary duty is no longer just about managing assets.
It is about safeguarding the conditions that make those assets valuable in the first place.

And that makes systemic stewardship not a stretch—but a necessity.