A report by the Asset Management Working Group of the United Nations Environment Programme Finance Initiative links the integration of ESG (environmental, social and corporate governance) issues into investment processes with legal responsibilities of fiduciaries (including pension trustees, asset managers and investment advisors).  It also calls into question whether the institutional investment industry responsible ownership activities have, to date, actually been fit for purpose.

The report, entitled 'Fiduciary responsibility: Legal and practical aspects of integrating environmental, social and governance issues into institutional investment'  follows on from the 2005 Freshfields Report  by the same group and the establishment of the UN PRI in 2006. It encompasses a legal commentary on fiduciary duty and the implementation of ESG in investment mandates, a survey of investment consultants on ESG integration and a summary of practical developments on ESG integration. It lays down a number of challenging provisions and observations designed to raise the profile and demand for Responsible Investment (RI).

With respect to investment mandates, asset owners and their advisors are challenged to:

• Establish RI as a default requirement of investment mandates instead of an optional add-on;
• Embed ESG issues into legal contracts and regulatory documentation (this could be made a part of the UN PRI requirements for signatories);
• Pro-actively raise ESG issues during take-on processes; and
• Report to clients their UN PRI performance assessments.

The investment advisor industry survey revealed the enduring overall impression of a 'tick box' mentality to ESG issues, which needs recognition both by regulators and civil society. The impact of Principle 4 of the PRI (inclusion of ESG in requests for proposals and the alignment of monitoring, performance indicators and incentive structures accordingly) is a "notable increase in the overall levels of ESG integration and engagement among asset managers" despite the fact that many signatories have some way to go on its' implementation.

The report saves its most incisive assertion for last: "Some have argued that the ongoing financial crisis may not have been so deep or so protracted if institutional investors had been collectively willing to challenge the financial institutions that were at the heart of creating the systemic risks within the financial system. We also believe that one of the most important lessons from the crisis is that institutional investors' responsible ownership needs to be strengthened in order to be fit for purpose".

Much lip service has been paid to the importance of integrating ESG into investment processes. This report importantly raises the bar from ESG integration being a 'nice to have' to the point of becoming an integral part of legal fiduciary responsibility and fitness for purpose of investment ownership strategy. 

'Fiduciary responsibility: Legal and practical aspects of integrating environmental, social and governance issues into institutional investment'

Freshfields Report

UN PRI