New legal report dubbed “Freshfields 2” in preparation

Co-author, Carlos Joly, says publication is likely to take at least a year.

A follow-up to 2005’s landmark legal opinion on responsible investment by UK law firm Freshfields is in development. The original Freshfields report, produced with the United Nations Environment Programme Finance Initiative (UNEPFI), challenged the orthodoxy that pension funds could not include environmental, social and governance factors in investment. It is believed the new report will broaden the UK scope of the original report to look at the legal situation regarding responsible investment in Europe.
The new report, which is already being dubbed “Freshfields 2” by observers, is being overseen by the author of the original Freshfields opinion, Paul Watchman, former Freshfields lawyer and now a partner at law firm Dewey & LeBoeuf. The working title of the new report is “Fiduciary 2.” Watchman is working with Carlos Joly, former senior Vice President of Storebrand Investments and former co-chair of the UNEP FI Asset Management Working Group, which sponsored the Freshfields report, titled: “A legal framework for the integration of environmental, social and governance issues into institutional investment.”
Joly said the report was “in very initial stages” and would likely take at least a year to put together. He declined to elaborate on its outline.
The Freshfields report was seen as a watershed in responsible investing when it was released. It gave legal backing to a long-running debate over whether ESGissues could be integrated into pension fund investment if they were felt to materially affect investment returns or pose reputation risk.
The report said: “the courts would in many circumstances view investment decisions that are made having regard to environmental, social and governance (ESG) considerations as appropriate.” The legal argument has not been tested in court since. Freshfields’ findings spawned increasing amounts of research by investment consultants, including Mercer and Watson Wyatt, which broadly reached the same conclusions. As a result, pension funds are now increasingly integrating ESG factors into their investment decisions.
The Freshfields’ report was particularly effective in questioning the Cowan v Scargill ruling, long considered as the biggest legal barrier to UK pension funds taking ethical investment decisions. In the 1984 case, the High Court ruled that the retirement scheme of the National Union of Mineworkers led by Arthur Scargill could not prohibit investment overseas or in industries in direct competition with the coal industry, which it said could damage returns on the fund’s investments. Freshfields said Cowan v Scargill had been interpreted too broadly and was not in itself a reason to rule out ESG consideration on investment. It also revisited a number of other key UK legal cases on the same question.
Click to download Freshfields/UNEPFI report