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Fiduciary II - Fiduciary Responsibility – legal and practical aspects of integrating environmental, social and governance issues into institutional investment July 2009 www.unepfi.org Fiduciary I – A legal framework for the integration of environmental, social and governance issues into institutional investment Oct 2005 www.unepfi.org 48
August 2009 Responsible Investing Fiduciary Responsibility One of the debates in trustee circles currently is what to do with the "SRI" issue. Is there a legal obligation on them to take into account Environmental, Social and Governance factors (ESG) in overseeing the assets of the members? Connected to this is the question on whether their advisors, predominantly the consulting industry, have any legal obligation to provide advice on the role of material ESG factors in Fund strategy designed, mandate construction and overall fund management. In 2005 a report research by Freshfields (The Freshfields Report ), published under the auspices of the United Nations Environment Programme's Finance Initiative (UNEP FI see http://www.unepfi.org/ ) argued compellingly for the integration of material ESG factors into investment management. This last month an updated report with more specific recommendations was released. "Fiduciary II" , as the report is being referred to, gives us an view on the state of play within the investment world today with a particular focus on the materiality of ESG factors within pension fund management and more importantly the role of key Fiduciaries in the process. The report reaches 6 key conclusions: "Fiduciaries have a duty to consider more actively the adoption of responsible investment strategies. • Fiduciaries must recognise that integrating ESG issues into investment and ownership processes is part of responsible investment, and is necessary to managing risk and evaluating opportunities for long-term investment. • Fiduciaries will increasingly come to understand the materiality of ESG issues and the systemic risk it poses, and the profound long-term costs of unsustainable development and its consequent impacts on the long-term value of their investment portfolios. • Fiduciaries will increasingly apply pressure to their asset managers to develop robust investment strategies that integrate ESG issues into financial analysis, and to engage with companies in order to encourage more responsible and sustainable business practices. • Global capital market policymakers should also make it clear that advisors 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. Furthermore, policymakers should ensure prudential regulatory frameworks that enable greater transparency and disclosure from institutional investors and their agents on the integration of ESG issues into their investment process, as well as from companies on their performance on ESG issues. • Finally, civil society institutions should collectively bolster their understanding of capital markets such that they can play a full role in ensuring that capital markets are sustainable and delivering responsible ownership." We think this report is likely to become a key reference document for SA Fiduciaries, as the need to achieve a more sustainable capital market heats up. 49
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14 August 2009 ESG disclosure lette
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