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

Report predicts legal threat if ESG factors
are ignored
By Barry B. Burr
Source: Pensions & Investments
Date: July 27, 2009
Some pension funds, investment managers and consultants that ignore environmental,
social and corporate governance factors in their investment decisions do so at their own
risk, according to a new U.N. report.
Pension fund fiduciaries under ERISA are “arguably required” to integrate ESG issues into their regular
investment decision-making process, Paul A. Hilton, director of advanced equities research, Calvert
Investments and co-leader of the project that produced the report, said at a July 21 teleconference on the report.
And investment managers and consultants could face negligence lawsuits if they don't consider such factors
when making investment decisions for pension funds and other clients, the report noted.
“These ESG issue are increasingly becoming very real and material issues that have bottom-line impacts on
companies,” Mr. Hilton said at the teleconference. “And so with that understanding, it's clear, unlike (using only)
a simple value approach, an approach that integrates these (factors) as part of the regular investment process
is arguably required by any major fiduciary and that certainly holds true” under the Employee Retirement
Income Security Act of 1974. “ERISA language says if it is a material issue, it needs to be considered (in the
investment process), and a lot of these ESG factors are material issues,” Mr. Hilton said in an interview after the
teleconference. “Within the report is a call to policymakers to be more clear on the responsibility of (fiduciary)
investors,” he continued.
Butch Bucani, program officer-insurance and investment of the United Nations Environment Program, said at
the teleconference that the report makes the case of “consultants and asset managers having a duty to
proactively raise ESG issues within their advisory services to asset owners.” Mr. Bucani was the project
manager and chief editor of the report.
“In tendering for investment mandates, it would be expected that the investment consultant or asset manager
would raise ESG considerations as an issue to be taken into account and discussed with the client, even if the
pension fund had not specified ESG considerations as material to the tender,” Paul Watchman, CEO of Quayle
Watchman Consulting, said in the report. Mr. Watchman was a legal consultant on the report.
“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 of care to the client by failing to
raise and take into account ESG considerations,” he said.
Among the recommendations in the report, “Advisers to institutional investors have a duty to proactively raise
ESG issues within the advice that they provide, and that a responsible investment option should be the default
position. Therefore, responsible investment, active ownership and the promotion of sustainable business
practices should be a routine part of all investment arrangements, rather than the optional add-on which many
consultants appear to treat it as.”
The report, “Fiduciary Responsibility: Legal and Practical Aspects of Integrating Environmental, Social and
Governance Issues into Institutional Investment,” was prepared by the asset management working group of the
United Nations Environment Program's Finance Initiative, which is a partnership of the U.N. and some 180
investment firms, banks, and insurance companies.
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