Fiduciary Duty Under Pressure: Who Owns Systemic Risk?
For institutional investors, risk has traditionally come with an implicit assumption: somebody owns it.
Company risk belongs in company analysis. Credit risk belongs with lenders and bondholders. Interest-rate risk can be modelled and managed. Concentration can be reduced through diversification. Investment mandates determine who is responsible for what.
Systemic risk is different.
When geopolitical instability disrupts supply chains, climate change affects whole economies, governance failures undermine markets or technological change reshapes industries simultaneously, the consequences do not sit conveniently inside a single security, asset class or investment mandate.
And that presents asset owners with an increasingly difficult question.
If nobody owns systemic risk, does everybody own part of it?
That question sits at the heart of Fiduciary Duty Under Pressure: Who Owns Systemic Risk?, one of the discussions at RAOEurope26 in London on 29 October.
It represents an important evolution in the fiduciary-duty debate.
The question is no longer simply whether pension trustees and other institutional investors are allowed to consider issues such as climate change, biodiversity or governance when investing.
Where those issues are financially material, the principle that they can — and should — form part of investment decision-making is well established. Travers Smith summarises the orthodox legal position as requiring financially material ESG considerations to be integrated alongside other relevant factors, while different tests apply where considerations are non-financial. Travers Smith
The harder question is what happens when financially material risks become systemic.
Because recognising the risk is one thing.
Deciding who should respond to it is another.
The limits of diversification
The modern investment industry has been built partly around diversification.
An investor concerned about one company can own another. Exposure to one geography can be balanced against another. Individual securities, sectors, currencies and asset classes can be combined to produce a portfolio with an appropriate risk profile.
But some risks resist that solution.
An investor cannot meaningfully diversify away from the failure of the financial system in which its assets operate. A sufficiently severe climate shock, geopolitical rupture or collapse in market confidence may affect public and private assets simultaneously.
This is particularly significant for large, diversified asset owners with liabilities stretching decades into the future.
Their ultimate exposure is not simply to a collection of companies.
It is to the health of the economies and markets within which those companies operate.
That changes the nature of the fiduciary question.
If a systemic risk could materially affect beneficiaries' long-term financial outcomes, simply establishing that it cannot be diversified away does not make it somebody else's problem.
But neither does it follow that trustees suddenly become responsible for solving it.
The difficult territory lies between those two positions.
Responsibility without control
A pension trustee cannot prevent a war.
An asset owner cannot determine national energy policy.
An investment committee cannot independently halt climate change, reverse biodiversity loss or establish global rules governing artificial intelligence.
That sounds obvious. But it exposes one of the central problems in the systemic-risk debate: responsibility and control are easily confused.
Fiduciaries do not need to control a risk before they can have a responsibility to understand its potential consequences.
The practical obligation may instead be to ask whether the risk is financially material; how it could affect beneficiaries; whether existing investment assumptions remain valid; what actions are available; and whether those actions are proportionate.
That is a much more demanding exercise than attaching an ESG label to an investment policy.
It requires judgement.
And increasingly, it requires governance capable of dealing with uncertainty.
The missing owner in the investment chain
There is another complication.
Modern institutional investment is heavily delegated.
Trustees appoint investment consultants. Asset owners allocate to asset managers. Managers may delegate elements of stewardship. Companies themselves operate through complex international supply chains. Regulators and policymakers influence the system around all of them.
So when a systemic risk emerges, who acts?
The trustee?
The CIO?
The consultant?
The investment manager?
The underlying company?
Government?
The regulator?
In practice, the answer may be several of them — but for very different reasons.
This creates a danger of responsibility disappearing down the investment chain.
The asset owner assumes the manager is dealing with it. The manager argues that government policy is required. Companies point to consumer behaviour or regulation. Policymakers expect institutional capital to exert influence.
Everyone can identify another institution with greater capacity to act.
Meanwhile the underlying risk remains.
For trustees and asset owners, therefore, one of the most important questions may not be “Can we solve this?” but:
“What part of this risk genuinely belongs to us?”
Where fiduciary duty meets stewardship
This is where stewardship becomes particularly important.
The earlier debate around responsible investment often concentrated on whether considering ESG factors was compatible with fiduciary duty.
The more sophisticated question today is what an asset owner should do after identifying a financially material systemic risk.
Changing the portfolio may be appropriate.
But selling an asset does not necessarily change the underlying system.
If one investor sells shares in a high-emitting company to another investor, the first portfolio's carbon exposure may change. The real-world emissions may not.
For long-term universal owners, that distinction matters.
It explains why stewardship has gradually moved beyond voting at annual meetings towards engagement, escalation, collaboration and scrutiny of asset managers themselves.
Yet this too creates boundaries.
When does stewardship remain an investment activity intended to protect beneficiary value?
When does it become an attempt to determine public policy?
How should trustees judge whether collaborative engagement is likely to make a difference?
And what happens when the action most likely to reduce a systemic risk conflicts with the short-term interests of an individual portfolio company?
These are not arguments for abandoning stewardship.
They are arguments for much greater precision about its purpose.
Governance may be the real battleground
Perhaps the most interesting development is that the answer to systemic risk may lie less in expanding fiduciary duty than in improving the way fiduciary decisions are made.
This is where the work of Travers Smith becomes particularly relevant.
Its analysis of pension trustees and ESG-related litigation risk places sound governance at the centre of trustee decision-making. It argues that effective governance systems are needed to identify financially material factors, weigh them alongside other relevant considerations, implement decisions and monitor what happens afterwards. Travers Smith
That distinction is important.
Fiduciary duty does not necessarily tell every trustee board to reach the same investment conclusion.
It demands an appropriate decision-making process.
Two well-governed schemes may examine the same systemic risk and legitimately respond differently because their liabilities, membership, funding, investment strategy, time horizons and ability to influence outcomes differ.
The test is not uniformity.
It is whether the decision is properly grounded.
That makes questions such as these increasingly important:
What evidence did the trustees consider?
What advice did they obtain?
What assumptions were challenged?
How was financial materiality assessed?
What alternatives were considered?
What was delegated to managers?
How will those managers be held accountable?
What would cause the trustees to reconsider their position?
And crucially, who records why the eventual decision was reasonable?
This is where law, investment and governance increasingly meet.
From policy documents to investment mandates
There is also a danger that systemic risk becomes something discussed enthusiastically at trustee meetings but lost during implementation.
A board may recognise climate risk, for example, while the investment mandate given to an external manager says very little about what the manager is expected to do about it.
That gap matters.
Travers Smith's sustainable-finance work specifically encompasses the design of investment policies, governing documents and service-provider mandates, including provisions governing ESG issues. Travers Smith
That suggests an important next stage for the industry.
The debate needs to move beyond “What do trustees believe?”
It needs to ask “What have trustees actually instructed?”
If an asset owner regards a systemic risk as financially material, how is that reflected in manager selection?
In mandates?
In stewardship objectives?
In escalation?
In reporting?
In monitoring?
And eventually, in capital allocation?
Otherwise there is a real risk that sophisticated statements of investment belief sit above an investment chain that continues largely unchanged.
The regulatory direction is becoming interesting
This discussion is also becoming more immediate in the UK.
Travers Smith reported in March 2026 that the Government had announced plans for statutory guidance intended to clarify how trustees can comply with their existing investment duties when considering systemic risks and opportunities, impacts on members' standards of living and, where appropriate, member views. The firm noted that the approach was guidance on existing duties rather than rewriting those duties in primary legislation. Travers Smith
That distinction could prove important.
It suggests that the next phase may not be about inventing an entirely new conception of fiduciary duty.
It may instead be about helping trustees understand how longstanding fiduciary principles apply to a world in which the financial consequences of climate, geopolitics, technology, nature and social instability increasingly interact.
And that creates a much more interesting conversation than another debate about whether ESG is good or bad.
The risk of overreach remains
None of this means every societal problem becomes an investment problem.
That would be both impractical and dangerous.
Trustees are not elected governments. Pension assets are not public-policy budgets. The existence of a serious social or environmental problem does not automatically make every proposed response financially justified.
Indeed, the wider the concept of systemic risk becomes, the more important fiduciary discipline becomes.
What is the transmission mechanism from the risk to beneficiary outcomes?
How material might it be?
Over what period?
What evidence supports the conclusion?
What influence does the investor realistically possess?
What would intervention cost?
And what are the consequences of doing nothing?
Those questions protect fiduciary duty from becoming infinitely elastic.
They also protect trustees from the opposite mistake: assuming that because a risk is politically contentious, it cannot also be financially material.
From “Can we?” to “How should we?”
That may be the biggest change in this debate.
Several years ago, much of the discussion around sustainability and pension investment centred on permission.
Can trustees take these factors into account?
The emerging systemic-risk discussion is much harder.
If the factor is financially material, how should trustees take it into account?
Who identifies it?
Who owns the response?
What is delegated?
What is retained?
When is diversification sufficient?
When is stewardship appropriate?
When should an asset owner collaborate with others?
And how should trustees demonstrate that their decisions genuinely serve beneficiaries rather than simply reflecting institutional fashion, stakeholder pressure or political preference?
There may be no universal answer.
Indeed, that may be precisely the point.
Who owns systemic risk?
Perhaps the answer is that no single institution does.
Governments set policy. Regulators establish frameworks. Companies determine strategy. Asset managers allocate and steward capital. Trustees and asset owners decide how beneficiaries' assets should ultimately be governed.
Systemic risk crosses all those boundaries.
The challenge for fiduciaries is therefore not to assume responsibility for the whole system.
It is to understand where their responsibility within that system begins and ends.
That is a more restrained proposition than claiming investors should solve the world's problems.
But it is also a more demanding one than simply saying systemic risks are somebody else's responsibility.
For long-term asset owners, fiduciary duty may increasingly depend not just upon understanding individual investments, but upon understanding the economic, environmental and institutional systems on which those investments ultimately depend.
And once a board concludes that a systemic risk is financially material, perhaps the most important question is no longer whether it should care.
It is:
What, precisely, is it going to do about it?
At RAOEurope26 on 29 October in London, Fiduciary Duty Under Pressure: Who Owns Systemic Risk? will bring trustees, asset owners and market practitioners together to examine where those boundaries now lie — and what they mean in practice for stewardship, governance and long-term capital allocation.
