New report aims to end debate about ESG and fiduciary duty

LONDON, 7 September 2015

A new report published by the PRI (with UNEP FI, UNEP Inquiry and the UN Global Compact) finds that fiduciary duty is not an obstacle to asset owner action on environmental, social and governance (ESG) factors. Fiduciary duty in the 21st century looks at fiduciary duty across eight markets (US, Canada, UK, Germany, Brazil, Australia, Japan and South Africa) through a series of events, interviews, case studies and a legal review. A roundtable discussion launching the report will be take place in London on Wednesday 9 September during the PRI’s annual conference PRI in Person.

Fiduciary duty has long been a contentious issue, especially in the US. Asset managers and advisers have often cited fiduciary duty as a reason for not incorporating ESG factors into the investment decision-making process, claiming that looking at non-financial indicators was not consistent with their fiduciary duty.

"Recent studies have broadened the interpretation of fiduciary duty away from the narrow confines of past definitions, and have emphasised that there is no conflict between fiduciary duty and ESG considerations – there is a growing recognition that ESG issues are in fact financially material to a portfolio,” said Fiona Reynolds, managing director of the Principles for Responsible Investment (PRI). “Using the status quo as a reason for not integrating ESG is no longer acceptable."

Fiona Reynolds, managing director of the Principles for Responsible Investment (PRI)

Despite significant progress on ESG integration, the report found that many investors have yet to fully integrate ESG issues into their investment decision making processes. Some of the reasons for this include outdated perceptions about fiduciary duty and long-term responsible investment. This is particularly true in the United States, where lawyers and consultants see fiduciary duty in very narrow terms, and tend to argue that asset owners must have an exclusive focus on financial returns.

Perhaps the most overarching problem is the lack of clarity around how ESG considerations are incorporated into the investment manager selection, monitoring and re-appointment process. The consequence is that asset managers are often not particularly incentivised to take action on responsible investment-related issues. This lack of incentive is compounded by the strong emphasis placed by asset owners on short-term investment performance.

In order to move towards a sustainable financial and economic system, the report recommends that all of the players in the investment process take specific actions in order for ESG to be implemented on a truly global scale.

“Immense progress has been made in showing why sustainability is key to long-term value creation for institutional investors. Further regulatory clarity around fiduciary duty and capacity building along the investment chain are critical next steps on the way to a sustainable financial system”.

Nick Robins, Co-Director, UNEP Inquiry

First, institutional investors need to ensure that their commitments to ESG integration are followed across the entire investment process. They also need to require companies to provide robust, credible and detailed accounts of their management of ESG issues, and of the financial significance of these issues as well as engage policymakers on issues relevant to long-term performance.

Second, intermediaries (legal advisers, investment consultants, stock exchanges, brokers and data providers) need to analyse and take account of long-term value drivers including ESG issues in their investment practices and processes while also ensuring that ESG issues are an integral part of codes of professional ethics such as the CFA, and through raising market awareness of the investment case for ESG integration.

Finally, policymakers should clarify that fiduciaries must take account of ESG issues in their investment processes, their active ownership and voting activities, and their public policy engagement and be transparent on all aspects of ESG integration and investment practice. Policy makers should also support efforts to harmonise national legislation and policy instruments (e.g. stewardship codes, disclosure requirements) on long-term responsible investment while also working to develop an international statement or agreement on the duties that fiduciaries owe to their beneficiaries.

About The UNEP Inquiry

The Inquiry into the Design of a Sustainable Financial System has been initiated by the United Nations Environment Programme to advance policy options to improve the financial system’s effectiveness in mobilizing capital towards a green and inclusive economy—in other words, sustainable development. Established in January 2014, it will publish its final report in October 2015.

More information on the Inquiry is available at: or from: Ms. Mahenau Agha, Head of Outreach

Please click on the link here to see the full report.

For more information, contact:

Joy Frascinella
Head of PR
Principles for Responsible Investment (PRI)
+44 (0) 20 3714 3143