By Margarita Pirovska (@MargaritaIP), Head of Fiduciary Duty in the 21st Century, PRI/UNEP FI in Geneva

Margarita Pirovska

At the end of this year, the Fiduciary Duty in the 21st Century project concludes with a final report. The conceptual debate around whether environmental, social and governance (ESG) issues are a requirement of investor duties and obligations is now over, and policy is being updated accordingly.

The manner in which fiduciary duty is defined has profound implications. Decisions made by fiduciaries cascade through the investment chain and in turn through the investment decision-making process, ownership practices, the way in which companies are managed, and ultimately the world in which we live.

The modern understanding of fiduciary duty is one that requires investors to:

  1. Incorporate ESG issues into investment analysis and decision-making processes, consistent with their investment time horizons.
  2. Encourage high standards of ESG performance in the companies or other entities in which they invest.
  3. Understand and incorporate beneficiaries’ sustainability-related preferences, regardless of whether these preferences are financially material.
  4. Support the stability and resilience of the financial system.
  5. Report on how they implement these commitments.

There are three main reasons why the fiduciary duties of loyalty and prudence require the incorporation of ESG issues:

  1. ESG incorporation is an investment norm;
  2. ESG issues are financially material, and;
  3. policy and regulatory frameworks are changing to require ESG incorporation.

The Fiduciary Duty in the 21st Century programme (a collaboration between the PRI and UNEP FI) was launched in 2016 following the realisation that the misinterpretation of fiduciary duties was the primary barrier to ESG incorporation in investment practice. Over the past fours years, the project has engaged with over 400 policy makers, regulators and investors across over ten major markets to raise awareness of the importance of ESG issues to the fiduciary duties of investors. Today more mainstream financial regulators and investors are looking at ESG integration, but the discussion on how this should be put in practice is ongoing in many markets, as evident in our market analysis.

We demonstrate a clear move from a legal case to a regulatory case, with ESG being clarified in law and regulation in major jurisdictions, with the exception of the US which is lagging. This year alone has seen 80 revisions of policy instruments around the world supporting, encouraging or requiring investors to consider long-term value drivers, including ESG factors.

Investors that fail to incorporate ESG issues are failing their fiduciary duties and are increasingly likely to be subject to legal challenge.

We live in an interconnected world and hence our policies and responses to the grand challenges society faces today need to be comprehensive and collaborative. Consequently, these changes in investors’ duties and in financial system regulation are not occurring in a vacuum. Policymakers, regulators and governments recognise that issues such as climate change and sustainable development represent systemic risks and opportunities that require explicit and targeted interventions. Many countries have started to implement the Paris Climate Agreement and the Sustainable Development Goals in national policy and regulations.

Some governments have formally incorporated sustainability in the mandates of their financial regulators. This integration of finance into sustainability policy, and the integration of sustainability considerations into finance policy, suggest that we are moving towards a much more integrated and aligned approach to policy across these two areas.

While it is now clear that there are positive duties to integrate ESG issues into investment decision-making and processes, further work is required in several areas.

We need to fill the gaps that remain in policy frameworks – while many countries have adopted at least one policy measure, most have yet to establish comprehensive policy frameworks. We must also ensure that policy and regulatory change is effectively implemented and translated into concrete actions. In addition, we must recognise that these discussions extend beyond investors and require involvement of other actors in the investment system.

In jurisdictions lagging on policy change – such as the US, investors must engage policy makers to urgently clarify ESG incorporation requirements, supporting efforts to institutionalise ESG requirements across the investment market as a whole.

Finally, we need to understand how and under what circumstances investors are responsible for the real-world outcomes of their investment activities. Fiduciary duties require ESG incorporation, however capital markets remain unsustainable. Currently, the legal and regulatory frameworks within which investors operate require consideration of how ESG issues affect the investment decision, but not how the investment decision affects ESG issues. Changing this will be our next phase of work through the Legal Framework for Impact project.

The modern understanding of fiduciary duty has been a crucial foundational step, but investors and policy makers now need to move beyond fiduciary duties. They need to consider the legal frameworks within which investors operate to more explicitly incorporate sustainability outcomes in investment processes. If not, the incorporation of ESG issues will have been for naught. This is where the true connection between finance and sustainability, and its positive impact, can be realised.

Wider public policy, more explicitly on real-economy outcomes, is the key next step in moving towards a more sustainable economy. At stake is a viable and prosperous world for all.



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