Globally, we’ve seen growth in ESG-related regulation for asset owners and investment managers, but not investment consultants.

We find that, where it exists, ESG regulation often has unclear objectives and weak drafting. It positions ESG as voluntary or in other words, not financially material, and not aligned with wider policy frameworks. We also found very little monitoring by regulators of ESG regulation.

Our research has identified three important policy and regulatory issues that influence the relationships between asset owners and their investment consultants:

  • the specific regulation that applies to investment consultants;
  • the wider regulatory framework within which asset owners and investment consultants operate;
  • the volume and rate of regulatory change.

The specific requirements for asset owners to use investment consultants differ between countries. Most countries do not impose any formal ESG requirements on asset owners, and no countries impose formal ESG requirements on investment consultants. Here we focus on the UK and US.


In the UK, the pensions act requires pension scheme trustees to “obtain and consider proper advice” on whether the investment is “satisfactory”. The act defines proper advice as “the advice of a person who is reasonably believed by the trustees to be qualified by his ability in and practical experience of financial matters and to have the appropriate knowledge and experience of the management of the investments of trust schemes”

Most trustees fulfil this requirement by appointing an investment consultant, however the content of the advice is currently not regulated. While the regulation is clear that the decisions of UK pension fund trustees must be “personal and conscious acts” and not taken “under the dictation of another”, our research finds that advice is often interpreted as instruction.

The FCA’s Asset Management Market Study (final report issued in 2017) raised concerns about the investment consultant industry.12 The study found that investors were struggling to assess whether they were receiving value for money from their consultants. It recommended that investment consultants be brought into the regulatory perimeter, subject to the outcome of a provisional market investigation by the Competition Markets Authority. The FCA’s study did not fully address ESG factors.

There remains some ambiguity regarding the extent to which pension schemes must incorporate ESG issues in their investment processes and decision-making.14 In its study of the fiduciary duties of investment intermediaries, the UK law commission concluded that “Where trustees think ethical or environmental, social or governance (ESG) issues are financially material they should take them into account.”

In March 2017, The Pensions Regulator clarified that trustees “need to take environmental, social and governance (ESG) factors into account if you believe they’re financially significant.”16 In September, 12 investment consultants, convened by UKSIF and AMNT, publicly committed to “draw the guidance to the attention of UK pension scheme clients”.


In the US, most investment consultants are regulated by the Securities and Exchange Commission (SEC) under the Investment Advisers Act of 1940.18 If a consultant does not meet registration requirements (based on assets under advice), they can register at State level. Similarly to the UK, the SEC disclosure requirements for consultants do not regulate the content of advice. However it does impose a “fiduciary duty” on consultants to provide “disinterested advice”.

The Department of Labor (DOL) is the primary regulator for corporate retirement plans, benefits and savings. Public plans tend to be regulated at State level. In 2015, the DOL issued new guidance regarding “economically targeted investments” (ETIs) made by retirement plans. The guidance acknowledges that “environmental, social, and governance factors may have a direct relationship to the economic and financial value of an investment. When they do, these factors are more than just tiebreakers, they are proper components of the fiduciary’s analysis of the economic and financial merits of competing investment choices.”

Our interviews found that consultants interpreted the guidance as clarification that pension plans can consider ESG factors, but not that they must consider ESG factors. While this guidance may have removed a barrier to ESG incorporation, it is not enabling it. A further announcement from DOL in April may have added some confusion as it advises that fiduciaries of ERISA covered plans must avoid too readily treating ESG issues as being economically relevant to any particular investment choice.

“The transition to ESG incorporation is limited by fiduciary fear. The DOL 2015 bulletin did help. However, there is the perception that the current administration will repeal that. Clients and advisers are worried about making a statement on ESG issues that they will need to retract.”


In Canada, there is little direct regulation or professional standards for investment consultants and there is virtually no direct regulation or professional standards related to ESG factors in investment advice and decisions. The strongest legal requirement is the requirement for pension plans registered in Ontario: “Under section 78(3), a plan’s statement of investment policies and procedures (SIPP) is required to include information as to whether environmental, social, and governance (ESG) factors are incorporated into the plan’s investment policies and procedures and, if so, how those factors are incorporated.”

Some investment consulting firms require investment consultants serving Canadian clients to be included in their SEC registration under the Investment Advisors Act of 1940. There are no specific ESG requirements from the SEC.

Securities Commissions regulate investing activity, but provide an exemption for sophisticated investors. Investors, such as pension funds, who invest over a minimum amount (e.g. $1 million in Ontario) are exempt and the Commissions focus their attention on protection of smaller investors. The CIA Committee on Investment Practice, obtained a legal opinion regarding registration requirements which advised that OSC registration was not required by actuaries working as investment consultants. However, some investment consultants have voluntarily registered their firms under OSC particularly if they are providing advice on buying or selling individual securities.

Fiduciary duty is coded in Provincial pension legislation under the various pension benefits acts (PBAs). The requirements of the Ontario PBA are as follows:

“The administrator has a duty of care and owes fiduciary duties to plan beneficiaries. The administrator must ensure that the pension plan and pension fund are administered in accordance with the Pension Benefits Act (PBA) and regulations, and the terms of the pension plan. The administrator is ultimately accountable to all participants of the pension plan (e.g., plan beneficiaries, plan sponsors and regulatory authorities).”

The administrator (of an Ontario registered plan) may delegate some responsibilities however, ‘these service providers – regardless if they are employees of the administrator or third parties – are subject to the same duty of care as the administrator.’ Even if tasks are delegated, the administrator is still ultimately responsible for ensuring that the pension plan and pension fund are being administered, and that the assets of the pension fund are being invested in compliance with the PBA, regulations and pension plan.

The fiduciary duty requirements of other jurisdictions are similar, as they follow Common Law. The Province of Quebec is different as they apply civil law. In partnership with SHARE, the PRI prepared guidance for the Alberta Treasury Board and Finance (ATBF) in updating regulation and guidance on ESG disclosures.


Investment Consultants in Australia are generally required to obtain an Australian Financial Services (AFS) licence to provide financial product and investment advice to asset owners and must comply with the AFS licence obligations. The general licence conditions include obligations to provide services efficiently, honestly and fairly, manage any conflicts of interest and ensure adequate financial, human and technological resources.

Trustees of superannuation funds are required to manage the fund in the best interests of beneficiaries, both under general trust law and under section 52 of the Superannuation Industry (Supervision) Act 1993. Superannuation fund trustees are also required to comply with the principles defined in Prudential Standards, which Australian Prudential Regulation Authority (APRA) is authorised to make. The Investment Governance section includes binding obligations on superannuation trustees to develop and implement an effective due diligence process for the selection of investments as part of an investment governance framework.

ESG factors are specifically contemplated in the related (however non-binding) prudential guidance SPG 530, which clarifies that there is no constraint to ESG factors being considered in making investment decisions so long as it is consistent with the other statutory supervision obligations and fiduciary duty.

The guidance also outlines that APRA expects a registered superannuation entity licensee would be able to demonstrate appropriate analysis to support the formulation of an investment strategy that incorporates ESG factors. So, where ESG factors are being considered, it is expected that investment consultants must include analysis to support this aspect of the investment strategy.

Professional regulatory frameworks

Professional bodies (CFA and actuarial bodies) are key standard setters in the investment consulting industry. They provide an assurance of quality to users of their members’ services and provide codes regulating their professional behaviour and conduct. We found that self-regulatory requirements are also weak within these bodies; for example, the professional qualification and accreditation obligations of actuaries do not include any formal requirements on ESG issues.

The Institute and Faculty of Actuaries (IFoA) recently issued a Risk Alert to all its members on climate-related risks.21 The Risk Alert is non-mandatory guidance recommending all actuaries considers how climate-related risk affect the advice they are providing.

The wider regulatory framework

A recurring theme in the PRI’s wider work on the regulation of the financial system has been that regulation fails to pay adequate attention to the responsibilities of investment actors for ESG issues.

Clarifying these responsibilities is a key focus for the PRI’s public policy engagement. In relation to fiduciary duty, for example, the PRI has pressed policy makers to clarify that asset owners must analyse and take account of ESG issues:

  • in their investment processes;
  • in their active ownership activities;
  • in their public policy engagement;
  • clarify that fiduciary duty requires that investors pay attention to long-term investment value drivers, including ESG issues.

The lack of formal obligations on asset owners to pay attention to ESG issues is one of the key reasons why asset owners have not systematically demanded that their investment consultants pay more attention to ESG issues.

A further issue is that companies and investors continue to neglect ESG considerations in their decision-making. The importance of ESG issues to their long-term success is systematically underestimated. This is a result of:

  • weaknesses in current regulatory and policy frameworks;
  • the lack of incentive provided by markets and market mechanisms (e.g. externalities);
  • a lack of information and disclosure (e.g. information asymmetries).

Regulatory overload

We are acutely aware that asset owners, in many countries, face increased regulatory burdens. This has had two effects.

Firstly, it has meant that policy makers have been reluctant to introduce additional regulatory requirements focusing on ESG issues. This reluctance is compounded by policy makers’ lack of understanding of responsible investment.

Secondly, it has limited the time they have available to focus on ESG issues in their investment practices and processes.

“The level of regulation impacting on DB pension schemes has been extraordinary. Even the big pension schemes are struggling. There is a level of bandwidth with any scheme.”

Potential solutions

  1. Clarify that asset owners and asset consultants must consider ESG issues in investment processes.
  2. Work with professional bodies to incorporate ESG within professional regulation.
  3. Support policy interventions to put sustainability at the core of financial regulation

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    Investment consultant services review

    December 2017