European Commission launches consultation on fiduciary duty and sustainability

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The European Commission has launched a consultation on fiduciary duty and sustainability, in one of its first actions responding to the EU High-Level Expert Group (HLEG) on sustainable finance.

In its interim report in July, the HLEG called on the Commission to clarify that the fiduciary duties of institutional investors and asset managers explicitly integrate material ESG factors and long-term sustainability.

And today, the Commission – the EU’s executive arm — has launched a consultation seeking views on this to inform an impact assessment of the proposal citing the “maturity and the interest of the HLEG recommendation”.

In the consultation document, entitled Institutional investors and managers’ duties regarding sustainability, the European Commission says the duties of care, loyalty and prudence – concepts consistent with the notion of fiduciary duty – are embedded in the EU financial legal framework.

But the Commission says that “it appears unclear” that they require institutional investors and asset managers to assess the materiality of sustainability risks.

“Market practices indicate that institutional investors and asset managers generally understand these duties as requiring a focus on maximising short-term financial returns and disregard long-term effects on performance due to sustainability factors and risks.”

The 35-page consultation document asks questions such as whether investment entities should consider sustainability factors in their investment decision-making.It also looks at what sustainability factors should be considered, including climate factors, other environmental factors, social factors and governance factors.

The current focus on fiduciary duty and ESG ultimately stems from the groundbreaking 2005 Freshfields report commissioned by the UN Environment Programme Finance Initiative (UNEP FI). This went on to feed into the Kay Review of 2012 and led to an influential review by the UK’s Law Commission.

The new EU consultation also asks how challenging it is to integrate different sustainability factors, in which areas of the investment decision-making process sustainability should be considered and whether beneficiaries of insurance or pension providers should be consulted on sustainability.

The document also quizzes respondents on their approaches to sustainability in their businesses, and the costs and benefits of it.

In August, writing for Responsible Investor, HLEG member Magnus Billing, the CEO of Swedish pension fund Alecta, said “a definition of fiduciary duties could have profound implications as the decision made by fiduciaries cascade down the investment chain”.

Staying at the EU (which today also launched an HLEG on “fake news”), the European Central Bank has responded to a letter from MEPs questioning its corporate bond purchases as part of the quantitative easing programme. The MEPs had questioned whether the purchase of bonds of gaming firm Novamatic met EU policies and values. ECB President Mario Draghi’s reply is available here.