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European Commission report calls for mandatory disclosure of responsible investment policy

EY study on fiduciary duty also suggests third party verification of PRI signatories

A report prepared for the European Commission has called for institutional investors to be obliged to disclose their responsible and sustainable investment policies on a comply or explain basis.

The disclosure of sustainable and responsible investment policies should be “mandatory for all institutional investors – including if they do not have such a policy in place” is one of the key recommendations of the study, produced by consulting firm Ernst & Young for the European Commission’s Directorate General (DG) Environment.

It calls for “monitoring and verification” to ensure institutional investors are indeed applying their sustainable investments as they claim.

“Many institutional investors benefit from being perceived as sustainable investors without doing anything,” the report – Resource Efficiency and Fiduciary Duties of Investors – notes.

It even suggests that third party external verification could be introduced for Principles for Responsible Investment (PRI) signatories or for those investors with a sustainable investment label.

The report comes as the European Commission has launched a public consultation on how institutional investors factor in long-termism and environmental, social and governance (ESG) information into investment decisions. The survey, which runs to March 25, will be used by the Commission to “assess the state of play in this field”. A feedback document will be made public afterwards.

The separate EY study – which does not necessarily reflect the official view of the Commission – also calls forinstitutional investors to measure the environmental and social impacts of their investments “to track that they are actually contributing to a resource-efficient economy”. It also calls for stewardship codes to be developed for asset managers and intermediaries.

The objective of the 124-page report was to provide clarification and policy advice on the integration of environmental and resource efficiency issues into the fiduciary duties of institutional investors such as pension funds, insurers and asset managers in the European Union.

“Many investors benefit from being perceived as sustainable without doing anything”

It shows that the integration of environmental factors in the investment policies and decision-making process of institutional investors is compatible with the existing legal framework related to fiduciary duties in all jurisdictions across the EU – as long as it is relevant to financial returns and the management of risk.

But it doesn’t see a need for legal changes. Rather it calls for action to “engage, enable and encourage” the entire investment community in taking environmental and resource efficiency issues into consideration.

The study relates the state of play in Europe with the conclusions of the UN Environment Programme Finance Initiative’s landmark Freshfields reports dating back to 2005.