Alina Neculae, Senior policy analyst, EU and France, Policy, PRI


Emerging policies, laws and tools developed by the EU support the pursuit of sustainability impact goals. However, limits remain on investors’ ability to invest or exercise stewardship in alignment with social and environmental goals, except where their actions are financially beneficial. Moreover, investors might not be aware that the pursuit of sustainability impact goals is permitted, in some cases required, and is aligned with their fiduciary duties.

Last year’s Legal Framework for Impact (LFI) report, authored by Freshfields Bruckhaus Deringer and commissioned by the PRI, UNEP FI and The Generation Foundation, aimed to clarify the latitude investors have – and the barriers they face – when investing for sustainability impact (IFSI, a concept developed in the report). The PRI has just published a follow-on report for EU policymakers that offers recommendations to address these barriers. The new EU LFI report builds upon the findings of the LFI report and the actions announced in the EU’s Strategy for Financing the Transition to a Sustainable Economy to propose changes that would enable investors to pursue sustainability impact goals more actively and widely, i.e., not only when a positive sustainability impact is instrumental in delivering financial return objectives.

Before reviewing the new report’s policy recommendations, it is worth revisiting the findings of the original LFI report, which was published in July 2021. It found that investors are likely to have a legal obligation to consider pursuing sustainability impact goals where it is necessary to realise their financial objectives (referred to as instrumental IFSI, see Figure 1). In some circumstances, investors can pursue sustainability impact goals for reasons other than achieving financial goals and in parallel with them (ultimate ends IFSI).


Figure 1: Investing for sustainability impact. Source: Adapted from the LFI report.

However, the report found a range of barriers that limit investors’ ability to pursue sustainability impact goals. In the EU those barriers can be addressed by reforms across three areas of policy:

  • investors’ duties (e.g., should investors consider pursuing sustainability impact goals when assessing beneficiaries’ best interests, setting investment objectives and engaging with investees);
  • processes (e.g., should investors incorporate beneficiaries’ sustainability preferences in the investment decision-making process);
  • disclosures (e.g., insufficient data from investee companies, which may inhibit the redirection of capital flow towards sustainable activities).

Much of the focus of the EU sustainable finance regulatory framework has been on disclosure requirements. Disclosure is necessary, but not sufficient. For example, the Sustainable Finance Disclosure Regulation does not fully distinguish between the sustainability impact of an investee and the investor’s positive influence on that impact. Moreover, it has introduced disclosure requirements for principal adverse impacts without addressing investors’ core investment and process duties.

There is a need to balance the current focus on disclosures with other guidance and obligations in order to provide the appropriate regulatory framework for pursuing sustainability impact goals. Mutually reinforcing policy interventions in the areas of investors’ duties, processes and disclosure requirements would help align capital markets with sustainability goals.


Figure 2: Areas for policy intervention to align capital markets with sustainability goals

To give investors greater confidence to pursue positive sustainability impacts through investment decisions and stewardship activities, policymakers should clarify:

1. When investors may – and when they must – consider pursuing sustainability impact goals;

2. How this is consistent with beneficiaries’ best interests;

3. How to integrate sustainability preferences in investment objectives and activities;

4. The relationship between financial and sustainability objectives.


1. When investors may – and when they must – consider sustainability impact goals

The objective of this policy recommendation is to clarify that, in applying the “prudent person” principle, insurers and occupational pension funds (1) may pursue environmental and social impact goals as a distinct goal, alongside financial objectives and (2) have an obligation to consider pursuing social and environmental impact goals where this would help achieve their financial objectives.

For example, starting from August 2022, insurers will not only need to assess sustainability risks that affect their investment performance but will also be required to take into account the potential long-term impact on sustainability factors of their investment strategy and decisions. Although this is a welcome development, more guidance is needed as to what taking impacts into account means in practice. Would this lead to more investing for sustainability impact?

2. How this is consistent with beneficiaries’ best interest

Beneficiaries have both a financial and non-financial interest in the sustainability of their social and natural environment. Investing for sustainability impact is a way to contribute to social and environmental sustainability, while recognising that beneficiaries’ financial and non-financial interests may not always align. Therefore, further work is needed to embed sustainability impact goals in the concept of best interest where they are relevant to achieving financial goals, and where they are relevant to serving beneficiaries’ wider interests. The EU LFI policy report explores possible options to address this issue.

3. How to integrate sustainability preferences in investment objectives and activities

Evidence suggests that fewer assets are committed to sustainable investment than what might be expected based on individual investment preferences. One explanation may be that investment decision-makers are not given adequate information about end-investors’ sustainability impact preferences or prompted to consider end-investors’ sustainability aspirations when selecting investments. Therefore, policymakers should clarify that sustainability preferences can be taken into account and encourage such investment behaviours.

4. The relationship between financial and sustainability objectives

Investors can work towards sustainability impact goals either if these are pursued in support of their financial objectives or if sustainability objectives are pursued as ends in themselves, in parallel to any financial objectives. In the latter case, there may be questions as to which objectives should take precedence – the LFI report finds that, at present, pursuing sustainability impact goals is generally only permitted as long as it does not have a negative effect on the achievement of financial objectives. Further guidance could be provided on how investors should determine and disclose the relationship between their sustainability goals and financial objectives.

Addressing sustainability issues is imperative for the stability of global markets. Through our continuous work on the Legal Framework for Impact project, we will propose policy reforms that will enable investors to actively, deliberately and systematically pursue sustainability impact goals, in alignment with their duties.

For more information about the EU findings of the LFI report, please watch the Investing for Sustainability Impact in the EU webinar held on 28 March 2022.




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