Fiduciaries should be legally required to integrate environmental, social and governance factors into investment decision-making, says a new United Nations report supported by investment managers representing approximately $2 trillion in assets under management.
The report, Fiduciary Responsibility-Legal and Practical Aspects of Integrating Environmental, Social and Governance Issue into Institutional Investment, was produced by the Asset Management Working Group of United Nations Environment Programme Finance Initiative (UNEP FI), a partnership between the UN's environmental arm and more than 180 financial institutions worldwide.
During today's news briefing, Calvert Investments, ClearBridge Advisors, Pax World Investments and UNEP FI experts revealed key findings of the report and discussed the responsibility fiduciaries have to incorporate ESG factors into investment decisions.
"We finally made the case that prudent fiduciaries should consider material ESG issues as an integral part of their investment decisions. 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'," said Paul Hilton, Calvert's director of advanced equities research and the Fiduciary II co-project lead.
"In order for our economy to advance in a responsible, sustainable way, ESG criteria should be incorporated into every investment decision," says Dr. Julie Fox Gorte, senior vice president for PAX Word Management Corp. and co-chair of UNEP FI Asset Management Working Group. "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."
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, cites the report.
Key findings in the report include:
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 SG issues into financial analysis, and to engage with companies in order to encourage more responsible and sustainable business practices.
Policymakers should ensure 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 that 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.
Click here for a copy of the 120-page report.