Advisors Must Raise Environmental, Social & Governance Issues with Clients - New Report

A group of US asset managers, representing approximately $US2 trillion in assets under management, say that integrating environmental, social, and governance (ESG) considerations into investment decisions should be a legal responsibility.

This follows the publication of a new report called Fiduciary Responsibility – Legal and Practical Aspects of Integrating Environmental, Social and Governance Issue into Institutional Investment, produced by the Asset Management Working Group of United Nations Environment Programme Finance Initiative (UNEP FI), which is a partnership between the UN’s environmental arm and over 180 financial institutions worldwide.

In the report Calvert Investments, ClearBridge Advisors, Pax World Investments, and UNEP FI experts revealed key findings and discussed the responsibility fiduciaries have to incorporate ESG factors into investment decisions.

Paul Hilton, Director of Advanced Equities Research at Calvert, and the Fiduciary II Co-Project Leader says the report makes the case that prudent fiduciaries should consider material ESG issues as an integral part of their investment decisions.

Hilton says this report takes the next step by making the case that advisors must be proactive in raising ESG issues with their clients, and by collectively calling on the investment industry, policymakers and civil society to move toward responsible and sustainable capital markets to help avert a ‘Natural Resources Crisis’.

Dr. Julie Fox Gorte, Senior Vice President, PAX World Management Corp., Co-Chair of UNEP FI Asset Management Working Group says this report makes a powerful case that investment managers may be putting clients at risk if ESG issues aren’t considered, and should be held responsible for those decisions. There must be a shift in investment philosophy to focus more on long-term, sustainable options, rather than short-term gains.

The report says professional investment advisors and service providers – such as investment consultants and asset managers–may have a legal obligation to incorporate ESG issues into their investment services or face a very real risk that they may open themselves up to legal liabilities if they do not.

The report also provides indicative legal language that can be used to embed ESG considerations in the investment management agreements and related legal contracts between institutional investors and their asset managers.

KEY HIGHTLIGHTS OF THE REPORT:

– The global economy has now reached the point where ESG issues are a critical consideration for all institutional investors and their agents.

– Investment consultants and asset managers have a duty to proactively raise ESG issues within their advice and services to institutional investors.

– ESG issues must be embedded in the legal contracts between institutional investors and their asset managers to hold asset managers to account, and that ESG issues should be included in periodic reporting by asset managers. Equally, the performance of asset managers should be assessed on a longer-term basis and linked to long-term incentives.

– Institutional investors will increasingly come to understand the financial materiality of ESG issues and the systemic risk they pose, and the profound long-term costs of unsustainable development and the consequent impacts on the long-term value of their investment portfolios.

– Institutional investors will increasingly apply pressure to their asset managers to develop robust investment strategies that integrate ESG issues into financial analysis, and to engage with companies in order to encourage more responsible and sustainable business practices.

– Policymakers should ensure prudential regulatory frameworks that enable greater transparency and disclosure from institutional investors and their agents on the integration of ESG issues into their investment process–as well as from companies on their performance on ESG issues.

– Civil society institutions should collectively bolster their understanding of capital markets such that they can play a full role in ensuring that capital markets are sustainable and delivering responsible ownership practices.

– Market incentives that reward long-term investment must be made to help create responsible and sustainable capital markets would help identify future challenges in the financial system, reduce the chances of further crises and help avert a "Natural Resources Crisis"–and accelerate the transformational process to a green, inclusive and sustainable global economy.

The 120-page report titled: Fiduciary Responsibility – Legal and Practical Aspects of Integrating Environmental, Social and Governance Issue into Institutional Investment can be found at www.unepfi.org