Paul Rissman, Co-Founder of Rights CoLab, analyzes a critical inflection point in corporate governance where the fiduciary duties of corporate boards and institutional investors are diverging, potentially leading to significant governance battles. This analysis is based on a Rights CoLab memorandum.
A complex scenario is emerging within the landscape of corporate governance: the fundamental duties of corporate directors and those of institutional investors, particularly retirement fund trustees, are increasingly coming into conflict. This clash stems from the growing recognition that corporations generating significant negative externalities—such as inadequate wages and environmental pollution—are contributing to systemic macroeconomic risks that threaten the long-term financial health of beneficiaries. As these risks are increasingly quantified and understood, a growing number of asset owners, bound by their own fiduciary responsibilities, are compelled to act, setting the stage for a potential showdown with corporate leadership.
At the heart of this brewing conflict is the fiduciary duty, a legal and ethical obligation to act in the best interests of another party. For corporate directors, this duty, particularly under Delaware law, is to the long-term value of the corporation and its shareholders. For trustees of diversified retirement funds, however, the duty of prudence and loyalty mandates protecting the financial future of their beneficiaries. When a corporation’s practices, deemed profitable by its board, are simultaneously identified as drivers of systemic risks that erode aggregate demand, damage productivity, and increase the likelihood of financial crises, these two fiduciary obligations can become diametrically opposed.
The Escalating Threat of Systemic Risks
The economic ramifications of systemic risks are becoming increasingly undeniable and are no longer confined to academic discussions. Climate change, for instance, is projected to inflict severe damage on the global economy. Projections from entities like Swiss Re estimate that global GDP could be 18% lower by 2050 without substantial mitigation efforts. BlackRock’s analysis suggests cumulative losses in global output could approach 25% over the next two decades under a "do nothing more" scenario. A joint study by Boston Consulting Group and the University of Cambridge warned that global economic output could be reduced by 15% to 34% if global average temperatures rise by 3°C by 2100, a trajectory that current forecasts indicate could be surpassed.
Beyond climate change, other systemic risks carry substantial economic weight. World Bank economists have found that a 1 percentage point increase in the Gini coefficient (a measure of income inequality) correlates with a decrease in GDP per capita growth of over 1 percentage point for the median country. Racial and gender inequalities are also linked to severe macroeconomic impacts. The World Bank estimates that ecosystem collapses due to biodiversity loss could cost over 2% of global real GDP annually by 2030. Furthermore, the rise of authoritarianism has been shown to negatively impact long-term GDP per capita growth, with democratizations historically leading to significant increases. Crucially, these risks do not operate in isolation; their interactions amplify their damaging effects.
The financial implications for investment portfolios are profound. The EDHEC-Risk Climate Impact Institute has assessed that over 40% of global equity value is at risk if decarbonization efforts do not accelerate, with potential losses exceeding 50% if climate tipping points are approached. A review of the top 30 U.S. pension funds by Ortec Finance indicated potential drops in investment returns of up to 50% by 2050 due to climate risk. Norway’s Government Pension Fund Global, the world’s largest sovereign wealth fund, reported that the present value of expected losses from physical climate risk on its U.S. equity investments could be as high as 19% to 27% under a current policy scenario, acknowledging these figures are underestimates that fail to capture systemic impacts.
The concept of market contagion underscores that even well-diversified portfolios are not immune. Systemic events can create correlated returns and volatility across assets and countries through trade, financial, or political linkages, as well as through panicked investor behavior. This interconnectedness means that widespread corporate externalities, which contribute to these systemic risks, ultimately diminish the value and stability of all investments, irrespective of diversification.
Asset Owners’ Growing Imperative to Address Systemic Risk
Faced with these mounting risks, asset owners, particularly defined-benefit pension funds with long-term liabilities, are increasingly recognizing their fiduciary duty to manage systemic risks. This imperative is being amplified by global corporate governance and investor organizations. The International Corporate Governance Network’s Global Stewardship Principles explicitly acknowledge that systemic risks, including climate change and wealth inequality, can affect sustainable value creation and the health of economies and financial markets. The UN Principles for Responsible Investment and the UN-convened Net Zero Asset Owners Alliance, representing 86 asset owners managing over $9 trillion, also highlight the dangers of systemic risks to portfolios.
Regulatory and legislative bodies are also taking note. In the United Kingdom, the Pensions Regulator has stated that managing systemic risk is fundamental to trusteeship. Proposed amendments to the U.K. Pension Schemes Bill aim to guide trustees in considering climate risk when investing in the best interests of their members. Major pension funds in the U.K. and Europe are actively implementing these principles. For instance, the U.K.’s National Employment Savings Trust (NEST) has indicated it may vote against board chairs of companies that significantly scale back climate commitments without adequate justification.
In the United States, public pension fiduciaries in states like Maryland, Vermont, and Connecticut have begun incorporating systemic risk concerns into their proxy voting guidelines, with Vermont explicitly reserving the right to disapprove directors on such grounds. Lawsuits have also emerged, such as those against the Canada Pension Plan Investment Board and the Cushman and Wakefield 401(k) Plan, alleging insufficient consideration of systemic risks. As emissions continue to rise, biodiversity declines, inequality widens, the rule of law erodes, and global freedoms diminish, the pressure on retirement trustees to address systemic risk reduction is likely to intensify.
Implications for Corporate Directors: A Shifting Landscape
The implications of this growing systemic risk activism are multifaceted for corporate directors. Companies that are at the forefront of climate change mitigation and adaptation may find it easier to attract capital from retirement funds. While pension plans are often bound by hurdle rates for risk-adjusted returns, a project’s potential to significantly reduce systemic risk, even with sub-par near-term returns, could be deemed investable if the long-term harm reduction outweighs the immediate financial trade-offs.
Conversely, directors of corporations that generate substantial negative externalities are likely to face increased pressure. Public companies are significant contributors to systemic risks; they account for a substantial portion of emissions from fossil fuel and cement production, and a third of global workers earn less than a living wage. Corporations have also been implicated in major crises like the opioid epidemic, which carries an economic cost exceeding a trillion dollars annually, and contribute to other systemic issues such as antimicrobial resistance and the erosion of freedom of expression. The systemic risks associated with artificial intelligence are also emerging as a growing concern for pension fiduciaries.
The legal framework for addressing these externalities within existing corporate structures presents a challenge. While Vice Chancellor Laster of Delaware suggested that corporations could voluntarily become Public Benefit Corporations (PBCs) to better address the needs of diversified investors, this has not been a widely adopted path for Delaware corporations. Only a handful of public companies have converted to PBC status, and shareholder resolutions requesting such conversions have historically garnered very low support.
In the absence of voluntary conversion, retirement fiduciaries may resort to more direct pressure tactics. These can range from supportive engagement and non-binding shareholder resolutions to "vote no" campaigns against directors and even proxy battles for board seats. While externalities are not yet a common theme in proxy battles, the ExxonMobil board saw three directors replaced following a challenge supported by several pension funds, partly due to inattention to climate risk. Similarly, activist investors and pension funds have engaged with companies like Apple and Ovintiv Inc. on issues ranging from child safety to environmental stewardship. As the vast pools of capital managed by retirement funds increasingly confront the persistent pursuit of share maximization by corporations, a resurgence of board activism focused on externalities is probable.
Asset Managers Navigating the Crossfire
Asset managers find themselves in a precarious position, often caught between the demands of retirement fiduciaries and their corporate clients. They risk losing business from both sides if they are perceived as neglecting externalities or, conversely, as prioritizing them over shareholder returns.
Two primary strategies are emerging among asset managers to navigate this complex environment: pass-through voting and opt-in stewardship. Pass-through voting allows clients to direct how their shares are voted, effectively outsourcing the decision-making and responsibility. While this offers a way for managers to avoid stewardship controversies, it can diminish their value proposition, reducing them to mere price providers, especially in passive management. Furthermore, clients often lack the resources and expertise of asset managers to conduct effective stewardship.
To address these drawbacks and attract clients focused on systemic risk mitigation, some major asset managers are experimenting with opt-in stewardship. BlackRock and State Street, for example, offer select clients stewardship services designed to reduce corporate externalities. BlackRock’s dedicated stewardship team may vote against directors if a company fails to commit to a low-carbon transition. State Street’s opt-in service can support shareholder proposals for climate transition plans, deforestation policies, and enhanced human rights and diversity disclosures.
However, the ability of U.S.-based asset managers to engage forcefully with U.S. companies is somewhat constrained by recent SEC staff guidance on Schedule 13G reporting eligibility. Smaller managers and those operating outside the U.S. have more latitude. The evolving landscape of asset manager stewardship, as exemplified by New York City Comptroller Brad Lander’s recommendation to re-evaluate BlackRock’s mandate, suggests that corporate directors can anticipate increased pressure from asset managers, in addition to asset owners, if opt-in stewardship gains traction.
The Backlash Against Systemic Risk Mitigation
The increasing assertiveness of pension fiduciaries in addressing systemic risks has not gone unchallenged. Conservative think tanks, state finance officials, and members of Congress have launched critiques, questioning the legality and appropriateness of considering systemic risks beyond immediate investment-specific factors. The American Legislative Exchange Council (ALEC) has drafted model legislation that explicitly excludes systemic risks from the definition of "material" for investment qualification.
In July 2025, financial officials from 21 states sent a letter to asset managers criticizing the assessment of long-term risks like climate change, framing them as efforts to force immediate actions that might not align with long-term business interests. More recently, in February 2026, the Chair of the House Committee on Education and Workforce wrote to the California Public Employees Retirement System (CalPERS), alleging that its commitments to labor standards and climate investing were aimed at advancing a social agenda rather than solely benefiting its employees, with veiled threats of legislative action. This indicates that corporations seeking to externalize harms may find allies in powerful political circles.
Forecasting the Impending Conflict
The precise timing and form of the collision between asset owners’ imperative for systemic risk reduction and corporate directors’ duty to maximize share value remain uncertain. One potential scenario involves asset owners aligning with activists to replace directors, as seen in the ExxonMobil case. However, this is less likely to be a widespread solution, as activists typically focus on improving share prices, not on mitigating systemic risks to diversified portfolios.
A more probable outcome is a proliferation of "vote no" campaigns against directors. While such campaigns can force directors to resign, boards may have the discretion to reject these resignations. This could lead to a surge in litigation. Alternatively, government intervention might offer a path to systemic risk reduction, but lobbying efforts require significant resources, and pension fiduciaries may be hesitant to invest in initiatives with uncertain outcomes.
Amidst this uncertainty, one certainty is that relations between the boards of companies generating externalities and their diversified asset owners will likely become increasingly contentious. In this escalating contest, the interests of the company’s largest shareholders, traditionally paramount, may find their influence diminishing. The paradox of corporate directors’ fiduciary duty potentially thwarting retirement trustees’ fiduciary duty is a profound challenge. The hope is that this paradox can be resolved before the unchecked systemic risks generated by corporate externalities inflict severe damage on the global economy and the retirement security of millions.