Major report outlines legal framework for moving from sustainability risk to impact

PRI, Generation and the UN release results from law firm behind Freshfields Report

A first-of-its-kind report analysing to what extent “investing for sustainable impact” is legally required or permitted across 11 key jurisdictions has been published by law firm Freshfields Bruckhaus Deringer. 

The 564-page report, commissioned by the Principles for Responsible Investment (PRI), UN Environment Programme Finance Initiative (UNEP FI) and Generation Foundation, aims to bring clarity around investors’ legal duties when it comes to impact investing, and suggests how policymakers in jurisdictions where such investments are “not enabled by the law” could look to address this. 

Speaking at the launch of the report, Fiona Reynolds, CEO of the PRI said the report will “underpin the next evolution of responsible investment”. 

PRI and the other commissioning organisations will use the findings to engage with policymakers, lawyers and investors on policy reforms outlined in the report in Australia, Canada, the EU, Japan and UK, she added.  

Jessica Andrews, Investment Lead at UNEP FI, said the goal was to “support a growing transition away from treating ESG as a risk factor towards investing for sustainability impact”.  

A Legal Framework for Impact analyses 11 jurisdictions’ legal landscape and looks at how far they permit or require what is defined in the report as “investing for sustainability impact” or IFSI.

Juliane Hilf, a Partner at Freshfields, described IFSI as “any activity that involves an investor intentionally attempting to affect behaviour of investees or other third parties in accessible ways that can help achieve sustainability goals”. Such goals should be broadly aligned with international frameworks such as the Paris Agreement or the UN Sustainable Development Goals, she said, adding that stewardship and policy engagement were covered by IFSI, as well as asset allocation . 

Freshfields published the pivotal 2005 report A Legal Framework for the Integration of Environment, Social and Governance Issues into Institutional Investment. Widely referred to as the ‘Freshfields Report’, it argued that ESG integration is “clearly permissible” for investors and is considered as a watershed moment in promoting the integration of ESG issues into institutional investment. 

In 2019, Freshfields authored Fiduciary Duty in the 21st Century, which found ESG considerations are required in investment decision-making to fulfill fiduciary duty. 

Commenting on Freshfields latest inquiry into whether the law required or permitted IFSI, David Rouch, a Partner at Freshfields, said: “The answer is yes, to a significant extent the law does, although given the diversity of jurisdictions and the investor types covered there are all sorts of variations.”

The report outlines two types of IFSI. First, traditional ‘impact investing’, described by the study as ‘Instrumental IFSI’, where financial returns will be directly linked to the achievement of environmental and social impacts. Second, ‘Ultimate-ends IFSI’, through which sustainability goals are pursued alongside returns. The latter “are permissible in most relevant jurisdictions in some shape or form” says the report, but Rouch added that legislation requiring or allowing such investments usually requires the prioritisation of financial goals. 

In April, the European Commission adopted new rules to update the way that fiduciary duty, or investor duties, are expressed in key legislation, in order to encourage investors to consider ESG factors. There is pressure on other regulators, including those in the UK, US and New Zealand, to follow suit. 

During a debate to mark the report launch yesterday, Eva Halvarsson, CEO of Swedish pension fund AP2 said: “The most important change that has happened and needs to continue is that this is a totally new way of thinking and a totally new way of investing for most of us, even those of us who have been doing this for the past 20-30 years. We need to start with ourselves, not just focus on the tools.”