The PRI’s CEO Fiona Reynolds delivered a speech at a meeting at the G20, convened by the World Bank, where she recommended to G20 policy makers and regulators that they clarify a need for positive duties to integrate ESG factors in the investment process.
See below for a full transcript of the speech:
My name is Fiona Reynolds. I’m CEO of the UN-supported Principles for Responsible Investment, or PRI.
The PRI is a UN supported initiative set up and launched in 2006 by Kofi Annan, with a mission to put sustainability at the heart of the capital markets. It now has more than 2,200 signatories representing more than US$82 trillion in AUM. And I mention this as the growth of the PRI, which has seen its largest gains in the last two years, is very much in line with the growth of responsible investment itself. Responsible investment is now reaching the mainstream.
Despite that growth, there still today lies confusion around the issue of fiduciary, or investor duties, as they are called in some countries, and the ability to include material ESG factors in investment decision making by some investors.
That is why I am speaking on the topic revising regulations to support sustainability and long termism.
In particular, I am recommending that G20 policy makers and regulators clarify a need for positive duties to integrate environmental, social and governance factors in the investment processes for long-term investors. I think Maurice from Aviva articulated well the need for consistent standards on fiduciary duty by the OECD and that too many regulators do not focus on sustainability.
As we all know, investors have duties and fiduciary responsibilities that they owe to their clients and beneficiaries. Similar duties exist across G20 legal jurisdictions, in both common and civil law markets and the manner in which investor duties are interpreted have profound implications
We have talked here this morning about climate risks. We all know that climate risks and the transition to a low-carbon economy are externalities that must be considered by investors, they must understand the risk to their portfolios and also consider the opportunities for investment if they are to act in their members’ best interest. Yet despite this, as it stands today, not all investors do consider material ESG factors or climate risks. This is a a failure of fiduciary/investor duties.
In our view, a modern interpretation of fiduciary duty is one where:
- Investors should integrate financially-material sustainability issues. This should be consistent with the timeframe of the obligation. For example, a pension fund may have liabilities of 30, 40, 50 years or more.
- Investors should understand and integrate the sustainability preferences of their clients. After all, it is their money.
- And investors should disclose their approach to their relevant policy makers and regulators.
However, while this modern interpretation is familiar to many investors, there are still some investors misinterpreting these duties. Too many investors are not fully integrating sustainability issues in their investment practice – and too many cite fiduciary duties, as currently written in some countries, as the barrier to doing so.
Without regulators or policy makers making a positive duty that is confirming that investors should consider material ESG issues, without it being written in black and white, unfortunately many investors still interpret this to mean that it is not part of their duties and they don’t need to act.
This is why we need a policy response, clarity and a level playing field.
As such, I encourage you to consider, and ultimately commit, to:
- Regulation that requires integration and disclosure of sustainability, or ESG, issues.
- Strengthened policy design. Unclear drafting that isn’t explicit means sustainability is often easy to disregard in the investment process.
- And finally, we need improved monitoring and supervision of investors’ ESG integration practices.
In our view, misinterpretations of fiduciary and investor duties cannot continue to be allowed to stand if we really want sustainable investment to flourish.
Thank you and I look forward to your input.