Externalities and Fiduciary Capitalism

The "fiduciary capitalism" perspective holds that institutional investors, such as pension funds, can promote a socially responsible agenda. It's in their best interests to do so because they bear the cost of practices that are socially harmful. These costs are called "externalities" and are defined as "the effect of a purchase or use decision by one set of parties on others who did not have a choice and whose interests were not taken into account."

Fiduciaries who manage pension and mutual funds may come to increasingly recognize that negative environmental, social, and corporate governance externalities will, over time, adversely impact the fund's portfolio. As a result, they have an incentive to eliminate the negative externalities in their portfolio, thereby yielding socially responsible investment policies and corporate governance. The fiduciary capitalism model also calls for a process of engagement with corporate managers rather than divestiture as the means to change corporate governance.

In 2006, the United Nations used this framework to develop their six "Principles for Responsible Investment," which provides institutional investors with new principles for their investment decision-making. The New York Stock Exchange has since signed on to these principles.