Fiduciary Duty and ESG Integration: Some Reflections from the UK

An investor roundtable convened by the PRI and UNEP Finance Initiative

On 19 March the Principles for Responsible Investment (PRI) and the UNEP Finance Initiative, convened an investor roundtable to examine how prevailing definitions and interpretations of fiduciary duty in the UK affect investors’ approach to the integration of environmental, social and governance (ESG) issues into their investment processes.

Perhaps the most striking conclusion from the roundtable was that the argument that investors should take account of ESG issues in their investment analysis is now seen as relatively uncontroversial by UK investors. This is partly due to the efforts and success of organisations such as the PRI. It also reflects the dramatic changes in the UK investment landscape over the past ten years. Mark Mansley (Chief Investment Officer, Environment Agency Pension Fund and one of the speakers at the roundtable) argued that: “A large number of mainstream fund managers now do ESG integration in a credible way, with this integration underpinned by a robust investment process…The consequence for asset owners is that ESG integration is easy, and it can be done without a mandate”.

It was also noteworthy that while the ideas underpinning the legal interpretations of fiduciary duty (e.g. duties of loyalty, care, prudence) continue to remain of fundamental importance, the law is just one of the influences on practice and performance.

For example, Paul Watchman (Honorary Professor, School of Law, University of Glasgow and author of the original Freshfields report on fiduciary duty) commented that: “The rule of law is an important ideal and shapes how people behave. However, what is really important is changing the culture of the industry as a whole”.

There was extensive discussion of this point. Many of the roundtable participants argued that what is needed is a mix of approaches: statutory clarity that taking account of environmental, social and governance issues in investment practice is something that should be expected rather than something that is merely not prohibited, codes of conduct and other materials that provide practical guidance to asset owners, asset managers and others on how to account for ESG issues in their investment practices.Also needed are wider processes of changing the culture of the financial industry, covering issues such as professional ethics and transparency.

Within this, one of the core themes of the roundtable was that asset owners need to think much more carefully about how they take account of their beneficiaries’ views in their investment practices and, in turn, to establish robust processes for engaging with these beneficiaries.

Despite the progress that has been made, it is clear that many UK asset owners and asset managers have yet to fully integrate ESG issues into their investment processes. Implementation is progressing at different rates, in different asset classes, and in different parts of the investment chain.

One of the main obstacles to progress is the difficulty in differentiating between those organisations that do ESG integration in a meaningful, robust manner and those which do not. While the roundtable discussion may have been influenced by the fact that many of the participants represented asset owners or asset managers who saw themselves as leaders on responsible investment, it was clear that there was interest in moving a step beyond current disclosure requirements. One of the key themes raised was the importance of education and training for trustees, equipping asset owners, and their consultants, with the resources and knowledge to hold investment managers to account on ESG integration.

Overall, the roundtable suggested that some of the barriers that prevailed in the UK 10 years ago – e.g. a lack of understanding of the investment relevance of ESG issues, the small number of mainstream investment managers that did a good job of ESG integration, the perception that it might be a breach of fiduciary duties to take account of ESG issues in investment practice – have now been overcome.

But that is not to say that we have reached a satisfactory endpoint. It was clear from the discussions that the investment industry as a whole needs to ensure that the views of beneficiaries are properly considered in investment practice, that standards of practice are raised across the industry as a whole, and that there is a need have an ongoing focus on the cultures and values of the investment industry.

The roundtable formed part of PRI and the UNEP Inquiry’s project ‘Complying with your Fiduciary Duty: A Global Roadmap for ESG Integration, which will examine the barriers to ESG integration in 8 countries – Australia, Brazil, Canada, Germany, Japan, South Africa, UK, and USA – and will propose practical actions for institutional investors and policy-makers to address these barriers. The final report from the project will be launched at PRI in Person in September 2015.For further information or to contribute to the project, please contact Will Martindale, Head of Policy, PRI or Elodie Feller, Investment Commission Co-ordinator, UNEPFI.

Nick Robins, Co-director, UNEP Inquiry
Will Martindale, Head of Policy, PRI
Rory Sullivan, Senior Strategic Advisor, PRI
Elodie Feller, Investment Commission Coordinator, UNEP FI