Panellists discussing the Bill urge institutional investors to move away from prioritising maximum returns to focus on long-term, broader impact.
Non-profit organisation ShareAction presented its New Responsible Investment Bill, backed by the All-Party Parliamentary Group (APPG), to UK politicians yesterday, calling for institutional investors to consider collective impact rather than individual risk for beneficiaries. The Bill proposes reforms to the remit and investment processes of pension funds, which represent £3 trillion in assets under management (AUM) in the UK alone.
“The long-outdated view that the only fiduciary duty is to maximise returns has meant that for too long the investment sector has failed to consider wider social and environmental impacts,” the Bill summary outlined.
The Bill proposes the widespread implementation of double materiality. It would require investors to consider the impact their portfolio decisions have on society and the environment as well as the financial value. If the investment industry continues to ignore the wider impact in its processes, it will “continue to operate as if in a vacuum, as if the way it functions has no impact on the real world”.
Section 6 of the Bill requires asset managers to “ensure that their ‘default’ fund and any funds marketed as ‘sustainable’ align with prudent consideration of ambitions set out in […] the Paris Agreement.”
The Pension Schemes Bill, which is currently in the process of passing through Parliament, makes some allowance for consideration and management of ESG factors, including Clause 124, which requires “occupational pension schemes to manage the effects of climate change as a financial risk and to report on how they have done so”.
The draft Responsible Investment Bill acknowledges that the responsibility of investing sustainably on behalf of beneficiaries is a “huge ask” of investors, and so calls for the Government to establish a UK Council for Investor Due Diligence, which would mirror similar existing councils in Norway and Sweden. The UK council would be expected to undertake due diligence into company activities, “issuing alerts and recommendations to fiduciary investors where companies are liable for adverse human rights impacts or environmental damage”.
Beneficiaries will also be empowered by the passing of the Bill, with more freedom to request information about exactly where their money is being invested, seeing as they are bearing the risk.
In a webinar operating under Chatham House Rules and led by the leader of the Liberal Democrats and Chair of the APPG, Sir Ed Davey, industry experts discussed how the “current working definition of responsible investment is actually rather narrow”, as “big investors look at [ESG] only to the extent that it improves portfolio returns”.
In a discussion of the Bill’s proposals, panellists focused on whether investors should be divesting from companies with low ESG scores or performance, or instead buying and evoking changes from within.
“One of the misconceptions about sustainable investing is the idea that for every ounce of impact you get you must sacrifice an ounce of financial return,” one expert pointed out.
By investing in less sustainable companies and enforcing change, panellists argued, it is possible to drive up share price by enabling a company to integrate ESG considerations into their business models and therefore become a more attractive investment, rather than divesting only to see the company suffer a drop in share price and/or financial performance under guidance from less ESG-minded shareholders.
“Stewardship is actually a better way to go than selection,” one panellist said. “Investors can have a real impact by generating positive change from within.”
“We need to recognise the fragility of an economy that focuses on individual risk at the expense of collective impact. We need our investments to build wealth, but also resilience, in a world where systems and people everywhere are connected,” the Bill added.
“We can and must ensure that the UK’s might investment industry does more to meet the long-term needs of ordinary savers, while avoiding investment decisions that cause grave environmental harm or violate human rights,” ShareAction CEO Catherine Howarth said in a statement.
ShareAction is a charity that has been working for the past 12 years to advocate for responsible investment in the investment industry.