Policy and regulatory issues influence the relationships between asset owners and their investment consultants.

The regulation of investment consultants

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.

In the UK, US and 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.

“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.”

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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