ESG-Responsible Investment and Fiduciary Duty

Participating in a conversation on Environmental, Social and Governance factors is a necessary part of investment.

Investors recognise that responsible investment helps them to better manage risks and deliver better outcomes for their clients and beneficiaries.

Policy makers have also begun to recognise that ESG issues can support – or undermine – public policy objectives. In fact, this publication is taking place against a backdrop of regulatory interest and policy making in the area of responsible investment.

The PRI identifies over 300 regulations or soft law initiatives that encourage or require responsible investment across the world’s 50 largest economies. Half of the regulations were introduced since 2013. Responsible investment policy is widespread and it is growing.

Some of these regulations are brand new, ESG-related regulations. But many are revisions – policy makers are adding in ESG clauses to existing capital market or corporate regulation to strengthen governance, risk management and transparency.

3 Categories of regulation

The regulation we identify falls into three categories. We shouldn’t view these as a ‘tick list’ but these are the ideas that seem to be catching on.

  • Firstly, pension fund regulations – usually taking the form of disclosure requirements around ESG issues through the statement of investment principles. These set the expectation that funds should consider ESG and increase client demand for ESG integration strategies.
  • Secondly, stewardship codes – these govern the way investors engage with investee companies. We increasingly see stewardship codes mentioning ESG integration as a key component. 
  • Finally, corporate disclosure – these are an enabler for responsible investment – you need quality information to feed into investment analysis. These are by far the most common type of regulation.

Low impact Regulation

Some regulation, like the French energy transition law, traverses all three categories. However, while investors perceive some regulation as impactful, there is a lot of ESG related regulation that investors don’t think is having much of an impact. For a few reasons:

  • Firstly, policy design. Often, the reasons for including ESG in regulation are unclear, and almost always not measured.
  • Secondly, ESG issues are often treated as voluntary, or conflated with ethical issues. Or to put it another way – regulation doesn’t treat them as financially material.
  • Often, responsible investment regulation isn’t aligned with wider policy frameworks.

Fiduciary duties

To resolve these issues, some policy makers have formed expert advisory groups or taskforces to deliver overarching policy recommendations for a sustainable financial system, such as the EU’s High Level Expert Group (HLEG) on Sustainable Finance. The group’s interim report, published in July 2017, has a number of recommendations including the clarification of “fiduciary duties,” a ‘sustainability test for future financial policy and a label for green bonds.

The PRI is encouraging other governments to follow suit. For their part, institutional investors can – and should – use their influence to support effective responsible investment regulation.

Case study:

in January 2016, the PRI, UNEP FI and The Generation Foundation launched a three year project to end the debate on whether fiduciary duty is a legitimate barrier to the integration of environmental, social and governance issues in investment practice and decision-making.

This follows the publication in September 2015 of “Fiduciary Duty in the 21st Century”. The report, based on a legal review and interviews with policy makers, investors and lawyers, concluded that “Failing to consider all long-term investment value drivers, including ESG issues, is a failure of fiduciary duty".

The PRI, UNEP FI and The Generation Foundation have since published country roadmaps, which set out recommendations to ensure this interpretation of fiduciary duty is reflected in investment practice across eight key capital markets.

About the United Nations-supported Principles for Responsible Investment (PRI)

The United-Nations supported Principle for Responsible Investment (PRI) is the world’s leading initiative on responsible investment. The PRI represents over 1800 signatories globally with approximately US $70 trillion in assets under management.