Big names back attempt to put an end to the debate about ESG and fiduciary duty

Major new report updating ‘Freshfields’ gets backing from the likes of Al Gore.

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A major new report on fiduciary duty updating the groundbreaking Freshfields report and backed by former US vice president Al Gore and Corien Wortmann-Kool, chair of major Dutch pension fund ABP, has said countries around the world need to clarify that fiduciary duty requires investors to pay attention to ESG factors in their investment processes, active ownership activities, and in their public policy engagement.

The Freshfields report, commissioned by UNEP FI from law firm Freshfields Brukhaus Deringer in 2005, concluded that integrating ESG considerations into investment analysis is “clearly permissible and is arguably required.” The report was seminal in evolving the investment industry’s attitude to fiduciary duty and ESG.

This new report, entitled Fiduciary Duty in the 21st Century, builds on the work of Freshfields, and aims to answer whether fiduciary duty needs to be redefined for 21st century investors though analysing the investment practices and fiduciary duty of eight countries: Australia, Brazil, Germany, Japan, South Africa, the UK and the US.

It finds that fiduciary duty is not the obstacle to integrating ESG it is commonly assumed to be across all eight countries. Interviews with investment professionals, regulators and legal advisors found fiduciary duty informed their investment and management practice towards ESG. Some went further arguing that fiduciary duty creates a positive duty on them to take ESG issues into account.

But, there was agreement that asset owners and advisors often pointed to fiduciary duty as the reason for not integrating ESG, especially in the US.Further, some interviewees, particularly in the US, said most lawyers and consultants tend to advise their clients that the law requires them to have exclusive focus on financial returns, with the belief that taking ESG issues into account will have a negative impact on investment returns.

The report makes a series of recommendations to create what it calls a “global roadmap for sustainable value creation”.

This includes institutional investors publishing commitments to ESG integration and responsible investment with explanations on how they align with fiduciary duty and policy makers and regulators clarifying that fiduciaries must take account of ESG issues. The report also makes country-specific recommendations, for example, it says given the scale and influence of the New York Stock Exchange and Nasdaq, they should strengthen their ESG disclosure requirements for companies.

The report is a joint project between the United Nations Global Compact, the UNEP Finance Initiative, the Principles for Responsible Investment and the UNEP Inquiry into the Design of a Sustainable Financial System.

The report is backed by a number influential groups, including the founders of sustainability investment firm Generation Investment Management, former US vice president Al Gore and David Blood, who call the report “a landmark piece in the global dialogue on the relevance of sustainability to fiduciary duty”. Wortmann-Kool, chair of €350bn ABP and Richard Lacaille, global chief investment officer for State Street Global Advisors have also supported the report. Link