Maurits Dolmans, Senior Counsel with Cleary Gottlieb, on the Climate Prisoner’s Dilemma and Fiduciary Duty

How could recent legal opinions shift state and private sector climate change obligations? Listen to Jason Mitchell discuss with Maurits Dolmans, Cleary Gottlieb, about how to rethink the obligations of fiduciary duty relative to climate action; why it may be the key to solving the climate prisoner’s dilemma; and what a legal framework for impact could look like.

Recording date: 08 August 2025

Maurits Dolmans

Maurits Dolmans is a Senior Counsel with Cleary Gottlieb in London. He worked for almost forty years on EU, UK and international antitrust law, especially in high-tech. In the last seven years, he has pivoted to sustainability – dealing with antitrust, fiduciary duties, litigation strategy, and climate tech innovation. He is coauthor of the recent paper, “Sustainable Fiduciary Duties: How fiduciary duties can be a key to escape the climate prisoner’s dilemma” which we discuss.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

Welcome to the podcast, Maurits Dolmans. It's great to have you here, and thank you for taking the time.

Maurits Dolmans:

Thank you Jason. It's my pleasure.

Jason Mitchell:

Absolutely.

Maurits Dolmans:

I should perhaps first say that I speak on my own behalf and nothing I say binds my firm or any client, and nothing I say serves to further any undisclosed interest. I have to say that.

Jason Mitchell:

I understand. Thank you for the caveat. So Maurits, I want to dive in with a paper that caught my attention that you recently co-authored titled Sustainable Fiduciary Duties: How Fiduciary Duties Can Be a Key to Escape the Climate Prisoner's Dilemma. It's a pretty provocative title, but can you lift the text off the paper to summarise its thesis? What's the problem you're describing and what's at stake here?

Maurits Dolmans:

Well, we were working on a project on fiduciary duties for the Secretariat of the Net Zero Lawyers Alliance. Fiduciary duties may vary in detail for different categories of fiduciaries such as pension funds, investment funds, banks, family funds, endowments, and so on. But there are some unifying principles. One is that where a trust exists to provide financial benefits for the beneficiaries, the paramount [duty] of the trustees is to provide the greatest financial benefits for the present and future beneficiaries. That's a quote from an old leading case called Cowan versus Scargill. So we were intrigued by this reference to future beneficiaries and we were looking at the impact of climate change on financial performance and future investment values. One of the things we found was a report by Professor Riccardo Rebonato of the EDHEC Risk Institute. EDHEC is the École des Hautes Études Commerciales du Nord, it's a leading French business school.

He and his team found that if we keep emitting greenhouse gases as we do now, assets will lose 40% of their value. The loss could be 50% or more if tipping points are reached – and this is the net present value of future loss of revenue. Now, the market hasn't obviously really priced it in yet, but that could happen any time as a gradual loss or a shock when it dawns upon markets what's happening. The way to minimise this loss, he wrote, is to implement the Paris Agreement, in which case asset value loss can be as low as five to 10%. And we saw several reports that provided background, so we dug into that. The 2024 State of the Climate report says that “we are on the brink of an irreversible climate disaster”. Climate change has accelerated since 2023 with unprecedented heat waves in the air and the oceans.

We've already reached 1.5 degrees heating and we are on the way to three degrees. We were supposed to be at 1.5 in 2050. Studies by Professor [Tim] Lenton of Exeter University and others point out that even below two degrees heating, we risk at least seven climate tipping points. These are irreversible self-reinforcing drastic climate changes. For instance, the North Atlantic Subpolar Gyre could collapse as early as 2040 if not before, and that could undermine European and global food supply, trade, our economy, and even our security. Third, the British Institute and Faculty of Actuaries published a series of reports concluding that this could lead to system-level economic collapse. These are not adventurous people given to speculation, these are actuaries. Yet they see a real risk of losing 20 to 30% of gross domestic product by 2050 and 50% by 2070. Now in past crises in 2008 and with COVID, we saw a recovery soon after, but this decline would be permanent.

Worse, and I found this really shocking, they find in their Planetary Solvency report that we are on track for 800 million to more than 2 billion dead from disease, hunger, thirst and conflict, as well as a breakdown of critical ecosystems, major extinction, reduced ocean circulation (I already talked about that), socio-political fragmentation and mass migration. Not pretty. Now these [are] new insights, because these are all reports from the last two to three years. They're of huge importance for investment fiduciaries. Many invest in new high-emission projects from new coal mines to beef in the Amazon, and when they invest, they think only about project-specific short-term return on investment. They routinely ignore that emissions of these kinds of projects have a boomerang effect on all other assets they own or manage. They lower the value of the fund or scheme or portfolio that the investor owns or manages as a whole. So these spillover effects -- economists call them negative externalities -- are not in the best financial interest of beneficiaries.

Now, we are not just talking about physical risks or litigation risks. These are system-level risks that affect the economy and financial markets overall. And they are cliff-edge risks. Especially if tipping points occur, the loss will be dramatic if our economy as we know it survives at all.

So we conclude in our paper that these new findings change the application of fiduciary duties for investors. They don't change the law, they change how investors should manage investments in accordance with existing rules. And we see five practical principles for fiduciaries that we can discuss later. But the key is that these principles are binding. They apply to every fiduciary investor, and that levels the playing field. This is important because as you discussed on your previous podcast, voluntary commitments or just permissive rules are not effective enough. Rules need to be binding to resolve the collective action problem that undercuts effective and consistent climate action. So long as they're just voluntary, even rational investors will continue to collectively make bad decisions when it comes to climate.

Jason Mitchell:

This is great context. The most immediate question that I want to start off is why are rational investors making collectively irrational decisions when it comes to climate? Maybe talk through an example of how the climate prisoner's dilemma plays out in practise, say for a pension fund trustee.

Maurits Dolmans:

Well, in essence, the problem is: why should I clean up my act if you don't? Imagine a pension trustee who has an opportunity to invest in bonds for some new coal power plant providing a nice fixed income for a cohort of new retirees; that happens every year. Let's assume the trustee even knows and realises that the emissions from that coal power plant contribute to climate risk for all other assets that the scheme owns. And this negative spillover effect will especially affect young pension plan contributors whose pension savings will not get them the same kind of pension as the older cohort once the economy has tanked 20 or 30% or more when they retire. Now let's say the trustees therefore want to skip the investment and put their money elsewhere.

They arguably have to do that under the even-handedness rule, which means that pension trustees can't do things to benefit one group like the older retirees, that hurts another group of beneficiaries, the young contributors. But they realise that if they don't invest others will. So they'll lose the opportunity, rivals will free ride on their forgoing, and the climate damage to the scheme will still happen. So they decide to still invest with the climate risk and indeed the system level risk being imposed on everybody. That's individually rational, but an outcome that's bad for everybody, including the pension scheme members themselves. And that's a classic collective action problem or prisoner's dilemma. We need binding rules to resolve that kind of dilemma and fiduciary duties are a readily available set of principles, so they can help do that.

Jason Mitchell:

Interesting. So you've mentioned this notion of system level risks now and it's peppered throughout the paper, but what exactly are these and why can't traditional portfolio diversification protect against them? In other words, how is climate change different from other investment risks that fund managers deal with every day?

Maurits Dolmans:

Fund managers deal on a daily basis with what's called idiosyncratic risks. These are risks that are specific to individual companies and regions and sectors and financial instruments and what have you. Modern portfolio theory says that you address these risks by spreading your investments. You don't put all your eggs in one basket. But risks related to climate change and nature loss are different. This is explained, and this is how I got to know about it, in a seminal work by professors John Lukomnik and James Hawley, it's called Beyond Modern Portfolio Theory Investing That Matters, a really important book. They explained that we cannot escape these climate risks and these system risks by traditional asset diversification because they affect all sectors of the economy, all regions of the world and all asset classes. In other words, modern portfolio theory is not enough, especially not if you're a universal asset owner, if you're invested in all kind of sectors and territories, geographies in the world.

They also find that system-wide developments determine as much as 75 to 94% of return on investment. So that's a negative if those risks are not contained, but it's really a positive if you can invest in effective transition to a clean economy. The upside is potentially enormous. So asset allocation and asset management should focus on reducing these risks and possibly eliminate system-level risk. Now, Lukomnik and Hawley are not alone. There are other outstanding academics we've read like Professor Ellen Quigley and Madison Condon, I think you've had her on the podcast. Costanza Consolandi, Peter Tufano, and others have written about this, too. Now, the threat on our interconnected world is very real. Gunther Thallinger is a board member of the global insurer Allianz and he wrote a LinkedIn post recently explaining one of the loss-transmission channels in a very compelling way, and it's really worth quoting, so I'm going to quote it if you don't mind.

He writes, "Entire asset classes are degrading in real time, which translates to loss of value, business interruptions and market devaluation on a systemic level. We are fast approaching temperature levels where insurers will no longer be able to offer coverage for many of these risks. Now if insurance is no longer available, other financial services become unavailable too. No more mortgages, no new real estate development, no longer term investments, no financial stability. The financial sector as we know it ceases to function. That's another eye-opener and investors need to address this system-level risk or we will see dramatic loss which is bad for beneficiaries." That's how we came to that.

Jason Mitchell:

Got it. It's an interesting point. I did see the post in LinkedIn and in fact actually in the podcast episode following this one we’ll be speaking to someone in the insurance field about climate risk in the US, so I'm really looking forward to that one. But back to the paper, one of the paper's conclusions is that fiduciary duties require, underline that, require effective action to mitigate and manage climate risk, including, as you said, these systemic climate risks. And that carries specific implications across the five principles for climate action that you lay out in the paper. This, in my mind, is a really important part of your legal framework for impact. So unpack these principles.

Maurits Dolmans:

Well, you say legal framework for impact. Actually, we build on a seminal report that Freshfield wrote for RPI, UNEP and Generation Foundation, which is called A Legal Framework for Impact, and that's what we build on. That report dates back to 2021. It's quite detailed. It compares the laws of various countries on fiduciary duties and concludes that fiduciary duties allow and in certain cases require trustees to take sustainability into account when allocating or managing assets. We think that the law now goes further because the facts are changing as I already explained. So these risks, the system level risks have become intolerable. So fiduciary duties now require all financial fiduciaries to take action. We see five principal implications.

First, when calculating anticipated return on investment for individual investments, for instance, in new high emission or emission intensive projects, fiduciaries should take into account the negative spillover effects on the fund or the scheme or the portfolio as a whole, or they should instruct their asset manager to do that. Because those system level risks are too high, it basically means staying away from new unabated high emission projects. We call that the first do no harm principle. I'm not talking about divesting securities in the secondary market. I'm talking about not making primary market investments in new or expanded unabated high emission project because the emissions are too dangerous, they trigger system level risks.

Second, when considering investment in transition projects including new energy and infrastructure in emerging economies, they currently think that the risks tend to be too high, but they should count the positive impact on the fund as a whole as part of the return on investment. This is particularly relevant for investments in renewables, advanced nuclear, or geothermal energy or energy storage, as well as climate technological innovation like carbon capture and storage. Because if the expected return doesn't meet the investment criteria at first sight, fiduciary investors should still take into account that these projects reduce the risk for all other assets that they own or manage.

So take for instance, an investment in transition, including in emerging markets. Aa paper by Bilal and Kaenzig of Stanford and Northwestern explained that this is profitable for the US and the EU individually even if they pay all of the cost for the transition worldwide. Now, Oxford Professor Doyne Farmer – who is a fascinating guy by the way – did a study, and I am going to quote him. He said, "A rapid green energy transition is likely to be beneficial even if climate change were not a problem." Basically because you get clean, cheap and secure energy. "And when climate change is taken into account, the benefits of a fast transition become overwhelming. At a discount rate of 5%, it yields overall fast transition savings up to 2070 of up to $255 trillion. At a lower discount of 1.4%, the range of expected savings is 88 to $775 trillion."

So the upside of investing in the transition is enormous, and that's what financial fiduciaries should focus on.

Now the third pillar, and I'll keep the other ones shorter: investors should integrate climate risk in secondary market investments decisions, including growing litigation risks and transition risks for fossil fuel securities.

Fourth, they should engage in active stewardship. That is to say, encouraging investee companies to transition to clean business and that again would reduce fund wide risks. And last but not least, they should engage in policy advocacy towards governments, to public sectors, and peers. And doing these five things, we think, is required in the best financial interest of fiduciaries.

Jason Mitchell:

How does all of this foot with the more conservative view that fiduciary duty is pretty open on exactly what a fiduciary chooses to do so long as they choose with sufficient diligence and in a way they believe serves the beneficiary's interest? I guess I'm trying to understand, does it mean that they can't ignore the options in your five pillars? Does it mean they could reject them if they consider them first, or does it mean that there may be other actions they could take?

Maurits Dolmans:

I think the answer is yes to all of those questions, but let's explain. Fiduciaries have a duty of loyalty and they have a duty of care and prudence when deciding what's in the best interest of the beneficiaries. They must adapt to changing knowledge and circumstances, they must seek advice, follow appropriate procedures and processes and take into account peer practicee and industry standards. But you're right that courts don't like to intervene unless a trustee exceeds the bounds of reason. In the US this is called the business judgement rule. So effectively what we are saying is that ignoring these principles altogether, not even thinking about them, is beyond the bounds of reasons, because of the new evidence on system level financial risks flowing from climate change and because we now know how collective action problems arise.

Supreme Court Justice Lord Sales and Professor Ellen Quigley from Cambridge University already foresaw this in 2019 and 2020. Professor Quigley summarised it actually quite nicely. She said, "Incorporating climate risk into an institution's investment decision was first prohibited” that’s years ago, “then permitted and may soon become mandatory”. We think this moment has now arrived because we now know climate change and system level impact is much worse than expected."

Let's keep in mind also that these five principles are fairly high level, perhaps apart from the first one. They require an internalisation of externalities, but they leave trustees quite a lot of discretion on to do it and how far to go. They require trustees to engage in active stewardship and policy advocacy for instance, but so long as they consider this in good faith, it leaves a lot of choice in when and how they're going to do so efficiently and effectively. For instance, if they think they don't have the means or knowledge to do it alone, they can get expert advice from proxy advisors or they can team up with industry associations within the bounds of antitrust. But allowing trustees to ignore these principle altogether would get us back to the trap of the prisoner's dilemma. Each individual would act rationally, but against the beneficiaries’ individual and collective interests. And by the way, we see courts beginning to recognise this in other contexts, for instance, in the Dutch Urgenda case and the Shell case against Milieudefensie.

Jason Mitchell:

Yeah, absolutely. I do want to come back to Urgenda and some of the other legal precedents that are sort of setting up for your thesis of required action. But first I want to stay on this idea of collective action and coordination because it sounds to me like you're essentially asking every fiduciary to act as if others will follow suit. What happens if they don't? How do you prevent the first movers from being disadvantaged?

Maurits Dolmans:

Well, many trustees are unaware of the externalities of unabated high emission investments. They don't think about how these create system level risk for all of the other assets they own or manage. So the paper is first and foremost intended to make them aware of this, in the long-term financial interests of the beneficiaries. It's not really to spur litigation. Second, many trustees are unaware of the prisoner's dilemma and how it results in decisions that are rational but bad for their beneficiaries in the end. Legal certainty about what fiduciary duties allow and require would give them comfort. That would lead to efficient behaviour. So you are right to say, "Well, that this is asking fiduciaries to act as if others will follow suit." We call it a kind of Golden Rule. Don't impose risk on other beneficiaries in other funds that you don't want them to impose on yours because if you do, others will do it to you too and you may have to face the legal consequences.

You may see fiduciary duties claims from beneficiaries for asset value loss. You may be sued under tort law by injured third parties. And we hope that the PRA and the TPR and others reflect this in guidance and enforcement too.

So you may ask the question, how do asset managers now determine spillover effect? And note, first of all, that they're not necessarily small. The Rebonato study estimates a 40% decline in a business-as-usual scenario, and system level impacts of tipping points could be even more dramatic, but the tools to assess these portfolio wide impact are being developed.

Ellen Quigley is running this Cambridge Bond Index project. It's very important by the way, because 90% of new capital flowing into new fossil fuel development comes from debt from bank loans and bonds. You have Schroeder's SustainX tool, you have Bloomberg's climate risk management solution, and then there's the work being done by the Externalities Investment Research Network and The Investment Integration Project. But if you want to keep it simple, you can also just integrate an internal carbon price before comparing returns of investment opportunities. So long as you take a realistic internal carbon price and count carbon cost of all scope one, two, and three emissions associated in the investment. If a trustee doesn't know how to do it, they should ask an expert. That's part of the duty of diligence and prudence anyway.

Jason Mitchell:

Yeah, I agree with you there, but that's probably a separate podcast and a discussion and debate around the internal price of carbon. But I do want to revisit one thing because you wrote in the paper that, quote, "Diversified investors can no longer diversify away from system level risks." That's clearly one of the big messages to come away from here, but your framework essentially asks investors to concentrate risk by avoiding entire sectors. You talked about divestment. You're not necessarily divesting, but you are, as you write, avoiding entire sectors. How do you reconcile system level thinking with, you mentioned before, modern portfolio theory and the benefits of portfolio diversification, something that, as I'm sure you recall, the energy crisis in 2022 ended up rewarding. What happens to beneficiaries if you're wrong about the transition timeline?

Maurits Dolmans:

System level investing theory doesn't say you should not spread risk. You should. It says that you should in addition, avoid the risks and externalities that undermine the value of your entire portfolio, and that could create systemic collapse. So we shouldn't fund the factories to make the rope to hang us with. There's no recommendation to concentrate risks. There's also no suggestion to avoid entire sector. You already mentioned that in your question. We're not suggesting divestment from secondary market in fossil fuels. Now, trustees may want to do that because of transition and liability risk, and because economic growth no longer depends on fossil fuels. There is, let's say, a systemic disconnect building up that economies and growth have depended for let's say a hundred years on fossil fuels. That connect is no longer there.

And you may well make money by investing elsewhere. The Rockefeller Foundation ironically in 2014 divested from fossil fuels and The Investment Integration Project calculated that as a result, they had an annual return of 7.76%, outperforming the benchmark by over a hundred basis point with 27% less risk. So you actually may make money by taking an index or an investment not including secondary market fossil fuels. But that's a question of just looking at liability risks and transition risks.

Jason Mitchell:

In the introductory sort of context, you talked about studies showing that the potential GDP losses range from 10 to 17%, that's the Swiss Federal Institute. You talked about it as high as 50%, which is the Institute of Actuaries, which support your central estimate of I think a 40% asset value destruction. Practically speaking, as an investor, where's the legal threshold? Where does it sit in all this? Would a 5% portfolio risk trigger fiduciary duties? Would 20%?

Maurits Dolmans:

Okay. The estimate of 40%, by the way, is of course not mine, but Professor Rebonato’s of the EDHEC Risk Institute. It's a very thorough study and worth reading. I don't think there's actually a fixed acceptable percentage. At a very high theoretical level, the acceptable percentage is perhaps what would have emerged in a counterfactual situation where fiduciaries from now on complied with their duties. The Rebonato study actually tells you about that. They say that if we manage to say within the limit of the Paris agreement, the asset devaluation could be limited to about five, perhaps 10% or at least in a single digit. So that sounds unavoidable and therefore acceptable so long as the investor also tries to cash in on the upside of climate investment opportunities.

But what really matters, I think, is the individual level. Now, some people say that investment managers or trustees cannot be expected to skip an opportunity to invest in a new high emission project if the marginal return on investment of that project is better than the marginal return you can get on the next best alternative without emissions. It's the kind of energy crisis example you mentioned the previous question. Now I can follow that reasoning as long as when you calculate the expected return on investment, you include the fund- or company-wide spillover effect of that investment. So what matters is the net or true return on investment after adjustment for the impact on the fund as a whole, including the externalities. And the total cost of carbon associated with the investment may be a yardstick for the financial externality, but keep in mind that the external effects of system level risk could be dramatic.

Jason Mitchell:

Well, I was going to say, yeah, what about the temporal aspect in all of this? To what degree should we start to differentiate between investor types? In other words, how does this vary between a pension fund with 30 year liabilities versus a hedge fund with a six-month investment horizon?

Maurits Dolmans:

Long-term investors like pension funds must of course ensure that their long-term assets match their long-term liabilities. They have to maintain asset value to the end of the life of the last surviving beneficiary. And that applies also to endowments and family funds and other long-term investors. I actually don't see much of a difference for short-term investors, and that may surprise you, but even a short-term investor will want to reinvest and they would expose their repeat investments to system level risks in the long term unless they plan to consume in the short-term. And even then, I think we can probably assume that the beneficiary wants to live long with a decent standard of living and see their children and grandchildren prosper. So perhaps the externalities aren't measured in the specific short-term investment return, but they should be, because they will have long-term implications for even short-term investors.

Jason Mitchell:

So the paper's undergone some revision, but in an earlier version, you wrote that quote, "Tom Gosling at best recommends investors to free ride on others who transition and at worst encourages everyone to join a race towards the cliff. If there's a risk the world may overshoot 1.5C target, investors should do more to avoid climate damage, not less." End quote. In my opinion, Tom's been pretty clear about this, certainly in the two podcast episodes I've done with him, about his concerns that investors are on a collision course between their net-zero commitments and fiduciary duty. And given the widespread defections from net-zero initiatives, it's definitely worth unpacking this. So I'm wondering if the difference in opinion can be reduced down to your idea that fiduciaries are required to take climate action based primarily on system level threats against Tom's assertion that climate risk has to be imminent, severe, fast acting, and cashflow relevant before fiduciaries have a duty to act. I feel like there's a temporal element to this, but it also feels a bit like word play and down to very subtle variations in the exact definition of materiality.

Maurits Dolmans:

Well, I think it's right. Good for you for doing your homework and looking at previous versions. The reason why it has changed is that I admire Tom Gosling and his critical thinking a great deal, and I felt that the early version was a little bit too strident, so I changed the tone. That's why. I had a very nice conversation with him. He graciously agreed to have a chat with me about it, and I much appreciated that. Now, I still worry that if financial investors stick to business as usual, the financial damage will increase and we will all fall off a cliff. So as you say, Tom wrote, and actually that's a good point of discussion, Tom wrote that fiduciaries may not be required to act unless climate change is quote, "imminent, severe, fast acting, and cashflow relevant." I actually think these conditions are already met.

Take a few of these reports. On the first one, on “severe”, the 2024 UN Environment Programme emissions gap report refers to what's called “catastrophic effects”, and effects are even more severe if you reach tipping points. Remember the study that I mentioned on the melting of the Himalayan glaciers by 2050 on which 2 billion people depend [for water], or the collapse of the North Atlantic sub-polar gyre, which would have dramatic consequences in the Northern Hemisphere. And there are even studies indicating that the Amazon forest may turn into a savanna or the entire Atlantic Meridional overturning current -- this is a piece of the Gulf Stream as it were -- may collapse or slow down, which would have worldwide effects. I think that's clearly “severe”.

Now, “fast acting”. Once climate determining systems tip, the situation can change fast and more important, the change is irretrievable. The collapse of the North Atlantic sub-polar gyre has been qualified as “an abrupt cooling event”. The point is not so much whether it takes one year or a decade; the point is that it can happen faster than society or the economy can adapt, and faster than masses of people can move away to avoid it.

Third, on “cashflow relevant”, Tom recognises that there is persuasive evidence, and I quote, "That there would be long-term net portfolio benefits from mitigating from a current policy trajectory of three degrees Celsius warming to a two degree or below scenario." Now, I couldn't agree more. The economic impact of climate change will be worldwide, especially if you have a cascade of tipping points, because of worldwide supply chains, global financial markets and pressure from climate refugees. Remember those studies from Rebonato, Tim Lenton, the faculty of Actuaries, Gunther Thallinger's on system level risk. I actually discussed this with the chief sustainability officer of a worldwide bank that will remain unnamed, and they confirmed that they already see quote "insurance deserts" in the US where real estate prices are declining, which affects local tax income and municipal bond values and kills local investment.

So insurance is the canary in the coal mine. I think what that CSO saw were the foothills of the mountain of problems that's coming.

So the key question, is this all “imminent” or not? Now, the 2024 State of the Climate report says we are on the brink of an irreversible climate disaster. And Tim Lenton warns of tipping points that are rapidly becoming high-impact, high-likelihood events even before we reach two degree Celsius. It appears from those studies that I mentioned, that tipping points are actually closer than we thought. The 2024 study by Utrecht University concludes that the risk of an AMOC (the Atlantic Meridional Overturning Current) change by 2050 is now 59%, give or take 17%. So a large uncertain risk, but a huge risk. The North Atlantic Subpolar Gyre is even more vulnerable to collapse and could hit Europe quicker in the coming decades when we reach 1.8 degrees warming.

So the longer we wait, the greater the risk and the higher the cost of mitigating them. And eventually when tipping points are reached, it becomes impossible to undo them. So what I'm really saying is I don't think that “imminence” is a good criterion. It's met, but I don't think it's a good criterion. Some academics, and Tom has mentioned this too I think, say that there is a delay between planetary damage and economic damage. It takes some time for it to work through to the economy and then it takes some time to work through in finance. And we can't require financial investors to act before the financial damage is felt. But I think we need to act before future damage is locked in. And we should keep in mind that it takes lead time to do that. So it requires acting now before climate change becomes locked in and irreversible.

Just to kind of put it in a folksy way, not a very pleasant one, if someone aims a gun at your child, your beneficiary, you as a fiduciary, as a parent, you have to stop the bullet before it's fired, not wait until it has hit. Professor Sachs of Columbia University put it quite well, actually. She said, "Climate-related financial stability risks may not be imminent," I disagree with that, "but that underscores the perversity of the discourse," she says. "By the time the climate risks are imminent for financial markets, it will be far too late to avert a catastrophic planetary and economic consequences." So whether imminent or not, in the words of the Exeter University study for the University Superannuation Scheme, another pension fund, “there is no time to lose”.

Jason Mitchell:

Maurits, let me take another run at this question because it's so important to this discussion and I want to be clear about it. I basically see two arguments. Your argument runs that fiduciary duty already requires climate action. Recent rulings like your Urgenda and the ICJ opinion only reinforce this. So if fiduciaries don't act, then they leave themselves open to legal action. The counter-argument I hear, particularly in the investment world, is the concern that if a fiduciary does act on climate considerations and ends up underperforming on a one, three, five-year plus basis, they at best face redemptions and at worse face legal action. And that seems to be supported by Spence v. American Airlines and to some extent ClientEarth v. Shell. So help me reconcile the legal stakes for both these arguments.

Maurits Dolmans:

My reconciliation of the two is to look at the two different option. Imagine that everybody starts investing without taking into account climate change. We'll see the prisoner's dilemma emerge, everybody is going to invest as if there is no tomorrow, and as a result, there won't be a tomorrow. Now, take the other opposite. People, trustees take into account climate change and in particular include the externalities of their investments in their investment decisions and they avoid decisions that undermine the long-term value of their portfolio and undermine the standard of living and the future of their beneficiaries. Those beneficiaries in the end are going to be happy. A trustee that carefully considers this and reasons it and, if need be, gets expert advice will be shielded by the business judgement rule and will be shielded by the defence that they are doing what's in the best financial interest of the beneficiary.

And a trustee who doesn't do this, who makes the investment as if there is no tomorrow, is going to expose themselves to litigation and damage claims on the grounds that they are contributing to a net asset value loss, net present value of future asset value loss, of 40% or more. So I think the choice is pretty clear and that if those two cases compete, the one that will succeed is a claim against the fiduciary who ignores climate.

Jason Mitchell:

That's interesting. In your framework, who brings the cases? Pension scheme members rarely have the information or resources for complex fiduciary breach claims and without enforcement isn't this just sophisticated legal theory? Now, in the agenda case, which you talked about a little bit earlier, the Netherlands ultimately did reduce emissions by 25% following the court ruling, which certainly suggests that legal enforcement can work, but that required a specific court order against a specific government.

Maurits Dolmans:

We would prefer to prevent rather than to claim damages. Damage claims are after the facts and that's too late. So what we are trying to do is to focus trustees’ minds on beneficiaries’ interests and to encourage regulators to give effective guidance on this. And if that fails, fiduciary duty claims can lead to orders and injunctions to prevent damage. Now, who would bring such a claim and who would bring a damage claim if everything goes wrong assuming that our economy survives? A number of leading cases on fiduciary duties were started by trustees suing other trustees like Cowan versus Scargill, Bishop Harries versus the Church Commissioners. Shareholders can sue directors, although it's not easy as you may remember from the ClientEarth versus Shell case.

And beneficiaries can sue of course. So imagine a class of young pension scheme members suing pension scheme trustees to stop them from investing in new unabated high emission project because these contribute to climate change that undermines the value of their pension savings. That breaches the even-handedness rule. I think there's an issue there.

In some cases, employers can sue if they, for instance, fund the pension scheme. They may sue if they worry that the scheme is taking so much system level risk that they may have to top up eventually. Supervisory authorities can take preventative actions too.

Now, litigation risks don't stop there. NGOs and non-governmental organisation can sue in tort law, the Milieudefensie versus Shell case and the Milieudefensie versus ING Bank case in the Netherlands for instance. And that's a case against a financial institution. So it's going in the direction that we are discussing. Now it's tort law, but still the thinking is similar.

Individuals can sue under nuisance law to recover costs, to prevent damage. The Peruvian farmer case Lliuya versus RWE in Germany is an example. That was just a few weeks ago.

I expect damage claims also from insurance companies and this is an interesting thing that's not sufficiently discussed. So we saw recently huge disasters happen like the Los Angeles fires, the Blatten landslide, the Valencia floods. Insurance companies pay out and they are subrogated to the victims' claims. They actually receive the right to sue instead of the victims. Now I expect the shareholders of these insurance companies to insist that the insurance companies should recover the damage from the ones who ultimately caused them. Why should the insurance company pay for damages caused by others? Those actions sound in tort or nuisance, but nonetheless, there are plenty of opportunities for litigation here.

Jason Mitchell:

Yeah, absolutely. I do want to come back in a second with this, but since we were talking about Urgenda, I think one interesting element, and I wanted to get your feedback on it, was the fact that the Dutch Supreme Court set an expectation that the Netherlands, as small a country as it is, was still obliged to, quote, "do its part." How do you carry over that principle to private entity fiduciary duty in the context of systemic risk?

Maurits Dolmans:

It's directly relevant. The Dutch government argued that the Netherlands is a small country. As a Dutchman, I agree. And they say a small country's action makes no differences globally and if we cut projects with high emissions, other countries will do them anyway. So that's kind of the substitution argument. That's of course exactly the prisoner's dilemma we discussed, and the Supreme Court gave it short shrift. They said that “acceptance of these defences would mean that a country could easily evade its partial responsibility by pointing out other countries or its own small share”, and they won't have that. “If on the other hand, this defence is ruled out, each country can be effectively called to account and the chance of all countries actually making a contribution will be greatest.” “No reduction is negligible”, they find. Now substitute investor fiduciary for the Netherlands and you get exactly the same reasoning. It shows that the reasoning in Urgenda supports the thinking in our paper about the collective action problem and how fiduciary duties can solve the collective action problem by imposing the same duty on everyone.

Jason Mitchell:

Interesting. The recent International Court of Justice advisory opinion clarifies state's legal obligations to address climate change, but how do you see it shaping private law claims against companies and financial institutions? And I guess by extension, how do you think this ultimately ends up shaping fiduciary obligations for board directors?

I'm thinking specifically about your reply to a recent LinkedIn post. I'm abridging it a little for length, but you wrote, quote, "As I see it, this will also foster private claims. The ICJ indicates that parties must act with heightened and stringent due diligence and make best efforts by using all the means at their disposal to mitigate climate change. The fact that many different sources contributed to anthropogenic climate is no defence for causality, attribution and quantification. This means not only an end to fossil fuel subsidies and new licences for fossil fuel expansion, but also a duty to put in place private law measures to enjoin future pollution and generally ensure that polluters pay. This gives further impetus to private claims under tort law, nuisance and fiduciary duties. This will be directly relevant, for example, for Milieudefensie's cases against Shell and others." End quote. So Maurits, let's unpack this.

Maurits Dolmans:

Well, you've done your homework again, but this about sums it up. Following the ICJ opinion, the International Court of Justice opinion, international law requires states to adopt domestic laws or interpret existing domestic laws such as tort law and fiduciary duties to require private entities to mitigate climate change. So normally ICJ judgments only apply between states, but this one has a spillover effect on the rules that bind private entities. At least states must require private players not to make it worse. And that's my “first, do no harm” rule again. So the ICJ makes it clear that international law binds all organs of the states, and that includes also the courts and supervisory authorities like in the UK, the PRA or the FCA. And if they don't, there is scope for liability. Other states make those claims and in some countries citizens can make tort claims against their state too.

So I do think that the International Court of Justice judgement requires states, including courts and the FCA and the PRA and others, the TPR, to interpret fiduciary duties in accordance with these international law obligations and now taking into account these new facts to interpret it like we set out in the paper.

Jason Mitchell:

It's interesting. I mean courts typically require concrete evidence of harm for fiduciary breach claims, but climate impacts are probabilistic. You in essence are asking fiduciaries to act essentially on tail risks that may not materialise for decades. How do you square the legal system's need for precision with climate science's inherent uncertainties?

Maurits Dolmans:

Well, climate change first of all is no longer probabilistic. We know it's happening and we know that heat waves and fires and flooding and extreme weather events cause damage and that this increases every year. I just recently saw that Munich Re, one of the reinsurers, estimates that the first half of 2025 saw climate related extreme weather events and wildfires damage at about $130 billion. And that's for the first half of 2025. And weather attribution and climate quantification science is making huge progress. The UCL in London at University College London has a leading world weather attribution project.

There's a very interesting paper by professors Mankin and Callahan, a seminal paper on what they call “end to end attribution” that links producers to specific damages from warming. They do a calculation, they find that more than half of the $28 trillion in damages from top heat waves between 1991 and 2020 comes from the top 10 fossil fuel companies. That's from heat waves only, not flooding, not extreme weather events and so on. They can attribute the incremental damage caused by climate change to what otherwise would be a normal weather event and they can quantify it.

Now what's probabilistic is when tipping points occur, but that's I think not a reason to ignore it. Remember the risk of an AMOC change in 2050, this Atlantic Meridional Overturning Current, is apparently 59%, give or take 17%. The consequences are dramatic. Now, would you as a parent, a fiduciary, let your child or a beneficiary board a plane that has that chance of crashing? Would you invest your pension in an asset that has a 59% chance of causing your pension savings irreversibly to lose 50% or more in value? I wouldn't, and gambling is not consistent with fiduciary duties. So the point here is really that “risk is the result of chance multiplied by impact”. The greater the impact and the more irreversible it is, the lower the chance that you can reasonably accept. So even if you don't know when this is going to happen, the fact that you know that the consequences are going to be dramatic means that you should not accept it now.

Jason Mitchell:

Got it. I want to stick on this point because I'm thinking that your framework, as we've talked about, requires fiduciaries to act on these tail risks, i.e., low-probability from a time perspective, high-impact events like these tipping point cascades. But it seems like the precautionary principle you sometimes invoke could justify almost any investment restriction if applied consistently. I'm playing sort of the counter argument. How do you distinguish between rational climate risk management and paralysing risk aversion when dealing with uncertain but potentially catastrophic outcomes?

Maurits Dolmans:

Well, climate change models often suggest a risk distribution in the form of a bell curve or a range with a highest probability point. And then policymakers and sometimes even investors if they're mindful of this, look at the high-likelihood event at the centre of the distribution, the mean, or they look at the average of various models as if those accurately predict the future reality. And that's actually a logical fallacy. They don't predict the future. They indicate what the risks are. Tom Gosling actually put it a little more carefully than I would, but he put it well. He says “if tipping points lead to extreme climate outcomes that could damage the economy or portfolio returns, there is potentially a fiduciary motivation to target a more stringent limit on warming of 1.5 degree Celsius rather than the two degree Celsius or so that might be justified by a focus on expected returns in the most probable outcomes.”

It's coming back to “risk is likelihood multiplied by impact”. And if the impact is so great, you can't accept even a small likelihood. The famous scientist, Johan Rokström, said something similar. He said every 0.1% of additional overshoot above 1.5 degrees Celsius increases tipping risks and greenhouse gas emissions therefore need to reach net-zero as early as possible and maintain it to minimise the risk of climate tipping points. So where the potential impact is worldwide and dramatic and irreparable, the thought that it is not certain to happen and that there is a delay before it materialises in my view is irrelevant.

I actually don't see this as leading to paralysis. You mentioned “doesn't this lead to some kind of paralysis?” We describe what we call a “first, do no harm” principle at the global scale. That's the first principle. Don't invest in new fossil fuels or expansion because we can't take that risk. Now you wouldn't say that this element of “first, do no harm” of the Hippocratic oath paralyses medical doctors. It just guides them to do the right thing for their beneficiaries, their patients. And that's what we say as well. What we are seeking is guidance to trustees to do the right things for their patients -- not to be paralysed. These five principles I mentioned are actually quite limited and rational as we discussed. And let's look at the bright side. Remember Lukomnik and Hawley and Doyne Farmer’s estimates on how much money you can make in financing the transition and climate technology and climate mitigation and climate adaptation. We should also look at the upside and that's where trustees should focus their attention to.

Jason Mitchell:

Got it. You write that fiduciary duties operate independently of politics and can fill the gap left by regulatory failure, but some would say that the ClientEarth v. Shell case demonstrates how politically conservative judges interpret fiduciary duties to prohibit climate action. Isn't this just shifting the political battle from legislatures to courtrooms with the same political divisions determining outcomes?

Maurits Dolmans:

I wouldn't think so. When I wrote that fiduciary duties operate independent of politics, I meant to address an argument that some people make, that private sector climate action is not legitimate if it's not in line with government policy. But people have all kinds of subjective reasons to vote one way or another in elections based on their private interests, their views, their preferences, and many of these bear no relationship with climate or with the beneficiaries best financial interest. So if a government with an anti-climate policy is voted in that does not absolve fiduciaries or trustees of their existing obligations to grow and preserve value for their beneficiaries. They have an objective duty of care and loyalty and that is not subject to a public ballot. A problem in my view is that many governments are missing in action. So the best chance we have are fiduciary duties in court and technical innovations. Courts tend to be more responsible in that sense.

I also think that the ClientEarth versus Shell case you mentioned is a bit of an outlier. The court found that the board of Shell was not liable for a failure to set effective interim milestones to meet their net-zero goals, which by the way, they themselves had set. And there are all kinds of explanations for that, and one of which is that a derivative action in the UK is very difficult, there are thresholds, and that corporate directors may have more discretion than financial fiduciaries. But the judgement was also roundly criticised, I actually would say demolished, by former Supreme Court Justice Lord Carnwath. And Pollination Law wrote an excellent opinion for the Commonwealth Climate and Law Initiative to explain how the outcome could be different the next time around. So I actually don't think that Shell case is determinative. I think just like the tobacco cases and asbestos cases, you lose a few cases before you start winning and once you win, the winning continues.

Jason Mitchell:

It's interesting you say that because I do want to stay on it because your paper presents a really elegant legal theory, but I keep coming back trying to understand what it ultimately means in practise. The ClientEarth v Shell case seemed to show, I think UK courts resistant to enforcing climate duties while the-

Maurits Dolmans:

One UK judge.

Jason Mitchell:

Yes. While the Spence v. American Airlines case shows the US Court finding that integrating ESG and climate considerations breach fiduciary duty. I should note that it did not breach duty of prudence. And it I think now seems that the US EPA will try to rescind the 2009 Endangerment Finding that links GHG emissions to climate change, which was importantly, I think supported by the Supreme Court finding in 2007. So what evidence exists that legal systems will embrace your interpretation when political systems when not all, but certainly some, have rejected similar coordination mechanisms?

Maurits Dolmans:

Yeah, well, I already mentioned the Urgenda case and the Milieudefensie vs. Shell case, which start to go in this indirection, but maybe as already said, the purpose of the discussion paper is to focus investor trustees minds. If they follow this approach, they do the right thing for beneficiaries and they're unlikely to incur liability. But if they don't, there are serious risks.

The Spence v American Airlines case you mentioned is actually not inconsistent with our paper. Let's look at the facts, not in too much detail, but American Airlines involved BlackRock as an asset manager in its pension plan, and BlackRock voted its proxy voting rights in favour of ESG proposals in portfolio companies, in shareholders meetings. A retired pilot didn't like that, and he sued. He argued that American Airlines had breached its duty of loyalty by allowing BlackRock to vote in this way. A Federal District judge in Texas agreed. That case is continuing. So the last word's not been said.

The case should also probably be limited to its specific facts because American Airlines corporate interest got mixed up with the beneficiaries interests, which were not aligned. There were other peculiarities too, and I don't have time to discuss, but I'd be happy to if you want to. The important point is that that judgement does not block the kind of thinking that we recommend in our paper, namely to focus on how climate change affects the financial interest of beneficiaries. The judge wrote very explicitly that, and I quote, "Investing that aims to reduce material risks or increase return for the exclusive purpose of obtaining a financial benefit is allowed. Consideration of material risk and return factors is no different than the standard investing process when both are focused on financial ends." And that's precisely what our paper proposes to do.

Now you mentioned the reports suggesting the withdrawal of the EPA Endangerment Finding. I am very worried about that, but I don't see that as relevant for fiduciary duties. It should be seen in a very specific US political context, which I hope is going to be temporary. And anyway, it is receiving pushback from climate scientists and I'm not sure that the withdrawal would stand scrutiny in court.

Jason Mitchell:

Interesting. Okay. Well that's good to hear. Final question. According to the London School of Economics, global trends and climate change litigation out of I think almost 3,000 climate cases filed in the world, an overwhelming number, I think almost 85 or 86% have been filed in the United States. What does that say about the jurisdictional opportunities and challenges when filing inside and outside of the US, particularly in terms of the court's receptiveness to this kind of litigation? I guess I'm also sort of thinking in the light of the fact that most of these cases have been filed in the global north. So where does that leave the global south in this conversation, especially in light of the disproportionately high adaptation financing pressures they face?

Maurits Dolmans:

Well, it's no surprise we see litigation in the US first. They have a tradition of litigation. They have extensive discovery proceedings that allow you to find evidence that you don't necessarily find in civil law jurisdictions. They have experience with class actions and mass tort and nuisance cases. And the state courts in various states are still enforcing the rule of law objectively. But we already see climate cases elsewhere, the Netherlands, the Urgenda case, the Milieudefensie versus Shell, Milieudefensie versus ING, in Germany, the Peruvian farmer, Lliuya versus RWE, New Zealand Smith versus Fonterra and elsewhere. And don't underestimate the global south because we have a number of climate cases there, admittedly not on fiduciary duties yet, but you have the 2015 Leghari case in Pakistan, a 2017 Colombia Supreme Court case, a leading to 2022 Brazilian Supreme Court case, the 2024 Ranjitsinh case in the Indian Supreme Court. And the Inter-American Court of Human Rights also gave a recent ruling, and I'm sure I skipped South Africa and various others.

So I mentioned what I think is the next frontier, which is insurance firms enforcing subrogated claims because their shareholders may not want to get stuck with bearing the financial brunt of ever-increasing physical damage resulting from climate exacerbated extreme weather events.

Now, maybe I should sum it up here. We hope to avoid litigation. Ideally, we would like to see financial investors take into account negative or positive spillover effect on the fund or scheme or portfolio as a whole. And existing principles of fiduciary duties already imply and support this because it's in the best interest of beneficiaries, and doing this could add real force to mitigation of climate change. Because when everybody is subject to the same rule, a social and economic tipping point can be reached.

Now I should perhaps add something here, which kind of ties back to your questions. We are not saying that binding fiduciary principles are enough to solve the climate and nature crisis. We also need government action and encouraging that is one of the five principles. We also need to facilitate mechanisms for capital flow to decarbonization in emerging markets as you mentioned, which is also part of one of the five principles we propose. And we need innovations like advanced nuclear technology that you discussed in the podcast with Katie Huff. But governments are backtracking, making the situation worse, so we have to pull out all the stops. And the good thing is that fiduciary duties are readily available. They're a tool that we can use now in a whole range of common law countries.

Jason Mitchell:

Great way to finish up. So it's been fascinating to discuss how to rethink the obligations of fiduciary duties relative to climate action, why it may be the key to solving the climate prisoners dilemma, and what a legal framework for impact could look like in this respect. So I'd like to really thank you for your time and insights. I'm Jason Mitchell, head of Responsible Investment Research at Man Group here today with Maurits Dolmans senior counsel at Cleary Gottlieb. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Maurits, thanks so much for this. This was a big one and super interesting.

Maurits Dolmans:

My pleasure. Thank you.

Jason Mitchell:

I'm Jason Mitchell, thanks for joining us. Special thanks to our guests and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.