Fund Solutions

Call for Sustainability Goals to be Built into Fiduciary Duties

PRI-commissioned report identifies ways investors navigate the law to align sustainability impacts with financial performance.

Policymakers need to do more to support institutional investors’ pursuit of sustainability impact alongside their fiduciary duty to drive financial returns, according to panellists speaking at the launch of a new report.

In ‘Legal Framework for Impact’, law firm Freshfields Bruckhaus Deringer reviewed the legal barriers to investing for sustainability impact (coined as ‘IFSI’) across 11 jurisdictions: Australia, Brazil, Canada, China, the EU, France, Japan, South Africa, the Netherlands, UK and the US. The report was commissioned by The Generation Foundation, Principles for Responsible Investment (PRI) and the United Nations Environment Programme Finance Initiative (UNEP FI).

Policymakers can act to “better align” sustainability-driven goals with fiduciary duty, said David Rouch, Partner at Freshfields and co-lead for the report, at the launch event. These include changing investors’ legal duties and discretions by allowing for the pursuit of sustainability goals, so long as financial returns are prioritised.

Current laws already allow for the pursuit of sustainability goals alongside an institutional investor’s other fiduciary duties “to a significant extent”, said Rouch. In fact, investors have a legal obligation to consider sustainability impacts in cases where they might positively or negatively affect financial returns, he said.

However, “given the diversity of jurisdictions and the investor types covered under existing laws” it’s incredibly challenging for investors to identify exactly when and how IFSI is allowed without further clarification through updated policies, Rouch added.

Policymakers should also do more to support investor collaborations, he said.

For example, policymakers could issue guidance outlining how investors can legally take collective action when seeking to achieve mutual sustainability objectives, further outlining how this discharges their duties even if an individual investor’s direct contribution and portfolio benefits cannot be precisely measured.

“Many sustainability challenges are essentially the result of problems caused by multiple actors and require collective action to resolve them. When investors engage in collective action, they increase their chances of a successful outcome to their sustainability impact activities and are potentially also spreading the cost,” Rouch explained.

Investing for sustainability impact

The report defines IFSI as any activities that involve an investor intentionally attempting to influence the behaviour of investee companies and other third parties in “assessable ways that can help achieve overarching sustainability outcomes”. This includes asking investee corporates to set net-zero targets.

Freshfields identified two different approaches by investors. The first is ‘instrumental IFSI’, where pursuing a sustainability impact goal is instrumental in realising the investor’s financial returns goals. In comparison, ‘ultimate ends IFSI’ refers to instances when achieving a sustainability impact goal, and therefore contributing to an overarching sustainability outcome, is a distinct target pursued alongside the investor’s financial return goals. This means that the sustainability impact goal isn’t being pursued to ensure financial returns. Most investors fall into the former category.

“Clarity on this question of purpose is important because of how the purpose of an activity influences the way it is undertaken and its outcomes, including which legal rules are relevant and how they are applied,” the report said.

Further reforms needed 

Drawing on the report findings, The Generation Foundation, PRI and UNEP FI have committed to a three-year work programme to help refine legal and regulatory environments so they are better equipped to meet investor demands for pursuing sustainability impact goals.

“This ground-breaking report shows how investing for sustainability impact is relevant for all investors, and that they will likely have an obligation to consider doing so where it can help in pursuing their financial objectives. It lays the foundation for the financial policy reforms we need to reorient investors and, through them, markets and economies towards net zero and inclusive, sustainable economic growth,” said Fiona Reynolds, PRI CEO.

‘Legal Framework for Impact’ follows on from Freshfields’ 2005 report, which concluded investors are permitted to integrate ESG factors into their analysis. The four-year Fiduciary Duty in the 21st Century project, launched in 2016 by the PRI and UNEP FI, also previously explored whether fiduciary duty is a legitimate barrier to the integration of ESG issues in investment practice and decision-making.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2021 ESG Investor Ltd. Company No. 12893343

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