New Study Pegs Institutional Investors' Legal Responsibility to Address Environmental, Social Issues

New Study Pegs Institutional Investors' Legal Responsibility to Address Environmental, Social Issues

Institutional investors have a far greater opportunity -- and in some cases a legal obligation -- to incorporate environmental, social, and governance issues into their investment decision-making than is traditionally believed, according to a new study done on behalf of the United Nations Environment Program's Finance Initiative (UNEP FI).

The study finds that the integration of environmental, social, and governance (ESG) issues into investment analysis, so as to more reliably predict financial performance, is clearly permissible and is arguably required in all jurisdictions.

The 150-page report, A Legal Framework for the Integration of Environmental, Social, and Governance Issues into Institutional Investment, focuses on the largest capital markets jurisdictions -- Australia, Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United States. It also considers the likely evolution of the interpretation of the law with respect to investors and ESG issues.

Klaus Toepfer, executive director of UNEP, commenting on the study, said: "This is groundbreaking work that will accelerate the integration of ESG issues into the mainstream investment community worldwide. What was once considered a niche area is set to become mainstream as institutions with trillions of dollars under management embed ESG thinking into their investment approach."

He added: "As the world's largest pension schemes, government funds, insurance reserves and foundations adjust, this will set in train a new dynamic along the investment chain. When these large institutional investors move on ESG issues the broader markets will listen and react."

Paul Watchman, partner at Freshfields Bruckhaus Deringer and senior author of the study, told more than 450 participants at the two-day UNEP FI 2005 Global Roundtable meeting at UNHQ that: "We are not suggesting that investors pursue a moral crusade but, in most jurisdictions, the law gives a wide discretion, encircled by general duties rather than exacting standards. A number of the perceived limitations on investment decision-making are illusory."

Watchman explained that those advocating a greater regard for ESG issues in investment decision-making often encounter resistance on the basis of a belief that institutional principals and their agents are legally prevented from taking account of such issues. "Far from preventing the integration of ESG considerations, the law clearly permits and, in certain circumstances, requires that this be done," he said.

Watchman, a keynote speaker at the UNEP FI Global Roundtable of bankers, insurers, and asset managers, as well as government and civil society representatives, continued: "It's not everyday that commercial lawyers have the opportunity to challenge industry to be more courageous, but that is the position in which we find ourselves having produced this report for the UNEP FI."

The report's lead author concluded by stressing that: "Institutional investors have more freedom to integrate ESG issues into their decision-making than they think. Whilst normally we find ourselves encouraging our clients to be more cautious, in this case we can instead say 'be more imaginative.'"

Download the full text of the report in PDF format online.