UNEP FI Asset Management Working Group The - UNEP Finance ...

UN-backed report says advisors and fund managers
risk being sued if they don’t put ESG in contracts
Follow-up to Freshfields report on fiduciary duty extends legal argument
on environmental, social and governance responsibility.
by Hugh Wheelan | July 15th, 2009
Institutional investment consultants and fund managers face a “very real risk” of being sued for negligence if they are
not proactive in incorporating environmental, social and governance (ESG) factors into legal contracts with pension
funds, according to a United Nations-backed report. The opinion, published by the Asset Management Working Group
of the United Nations Environment Programme Finance Initiative (UNEP FI), a partnership between the UN and over
180 financial institutions worldwide, is titled Fiduciary 2, and is a follow-up to 2005’s Freshfields report that looked at
whether pension trustees, notably in the UK but also in different countries, would be breaking fiduciary law if they
considered ESG aspects in investment. It goes further than its predecessor by suggesting that the contract law under
which consultants and asset managers operate in some jurisdictions could see them taken to court if they are found
not to be providing a “duty of care” on issues such as environmental protection.
The report is based on the legal opinion of Paul Watchman of Quayle Watchman Consulting in the UK, principal
author of the Freshfields Report, and Michael Gerrard, Robert Holton and Aron Estaver of Arnold & Porter LLP in the
US. The report says consultants and asset managers’ mandate contracts and operation under tort law as professional
advisers mean they could
be obliged to raise ESG considerations that could be “material” to the contract, or face action if they don’t: “As
professional investment advisers, investment consultants and asset managers are under a contract for services rather
than a contract of service. They are professional advisers to the client, not employees of the client; hence in
exercising significant professional discretion (unless the professional investment adviser contracts out of that duty and
even then it may be doubted if this can be done successfully), investment consultants and asset managers must be
proactive rather than reactive.” The report said: “If the investment consultant or asset manager fails to do so, there is
a very real risk that they will be sued for negligence on the ground that they failed to discharge their professional duty
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