UK: Integrating sustainability goals across the investment industry

Governments around the globe have introduced a spate of policies in recent years to encourage responsible investment. Investors also increasingly recognise that financial returns depend on the stability of social and environmental systems. However, most investors and other financial actors are still failing to play their full role in addressing growing sustainability challenges.

The extent to which legal frameworks support investors’ efforts to do so is examined in a 2021 report, A Legal Framework for Impact, authored by Freshfields Bruckhaus Deringer and commissioned by the PRI, the United Nations Environment Programme Finance Initiative and the Generation Foundation.

The report finds that in the 11 jurisdictions analysed, including the UK, investors are broadly permitted to consider pursing sustainability impact goals where this would contribute to their financial return objectives. Specifically, the extensive legal analysis concludes that:

• financial return is generally regarded as the primary purpose for investors;
• investors generally have a legal obligation to consider pursuing sustainability impact goals where that can help achieve their financial objectives;
• in some circumstances, investors can pursue sustainability impact goals for reasons other than achieving financial return goals (i.e., as an ultimate end);
• investors are legally required to pursue improved sustainability impacts if the objective of the financial product commits them to doing so.

However, the report also finds that the way UK investors understand and discharge their duties in practice may be discouraging them from pursuing positive sustainability impacts or even considering doing so. Furthermore, the UK legal framework limits investors’ ability to pursue sustainability impact objectives as an ultimate end, rather than in support of financial objectives.

Similarly, our own analysis shows that many UK investors remain hesitant to change their established practices and pursue sustainability impact goals, even when this is required to achieve financial objectives.

Building on the Legal Framework for Impact report, this paper explores how UK policy makers could mainstream responsible investment writ large, helping the country achieve its climate and other sustainability goals.

The UK’s existing requirements on responsible investment are focused on disclosures of sustainability risks: investors must report how they manage environmental, social and governance, or ESG, risks to investments, rather than if and how they tackle the sustainability impacts of their investments.

In contrast, leading responsible investors are using a much bigger toolkit to achieve positive sustainability impacts through their investments, with asset allocation, increasingly ambitious stewardship, and engagement with policy makers all brought to bear.

This report examines relevant aspects of the UK legal and regulatory framework and identifies areas where guidance and policies are insufficiently clear, potentially limiting institutional investors’ willingness or ability to pursue sustainability impact goals. It then recommends policy measures that would empower investors both to consider sustainability factors and to pursue sustainability impact goals, in particular where these are relevant to financial returns.

Policy recommendations

1. Clarify when sustainability impact goals must or can be considered as part of the duties of loyalty, care and prudence
2. Clarify that purpose-related requirements (sometimes described as a duty to act in clients’/beneficiaries’ “best interests”) entail consideration of sustainability impact goals
3. Ensure stewardship powers are used to achieve sustainability impact goals

Policy areas for further consideration

1. Sustainability-related disclosures and labelling/classification of sustainable investment products
2. Competition law
3. Options to enable consideration of certain sustainability impact goals and of individual investors’ views on sustainability
4. Guidance for pension schemes on assessing relevance of social and environmental goals