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Advisers must proactively raise ESG issues with clients, says UN group

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A group of asset managers, representing approximately USD2trn in assets under management, say that integrating environmental, social, and governance considerations into investment decis

A group of asset managers, representing approximately USD2trn in assets under management, say that integrating environmental, social, and governance considerations into investment decisions should be a legal responsibility.

The statement is outlined in a new report, ‘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, a partnership between the UN’s environmental arm and over 180 financial institutions worldwide.

"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," says Paul Hilton, director of advanced equities research at Calvert and the Fiduciary II co-project lead.

"This new report on fiduciary duty provides a significant, multi-faceted analysis of the legal and practical ESG developments in the global investment arena, including updated legal views from North America. With forward-looking commentary and recommendations from leading legal experts, investment consultants, and asset managers, it appears that institutional investors will have an easier time allocating to well-managed sustainable investments," says Mary Jane McQuillen, director and portfolio manager, socially aware investment at ClearBridge Advisors, and the Fiduciary II co-project lead.

Professional investment advisers 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 the risk of opening themselves up to legal liabilities if they do not, the report says.

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.

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

It says 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.

The group believes 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 also 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.

The report states that 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.

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