Findings on design and monitoring of responsible investment regulation around the world

Policy design

  • Responsible investment policy tools have unclear objectives, or the objectives are not specific enough to provide an accountability framework for stakeholders. They don’t match the level of ambition of international agreements like COP21 or the SDGs.
  • They aren’t aligned with wider policy frameworks, meaning that action encouraged under these policies isn’t supported, and may even be undermined by other pressures.
  • All stewardship codes are voluntary and much pension fund regulation operates on a ‘disclose if you consider ESG’ basis. This gives the impression that stewardship and ESG integration are optional. The PRI fs previous work shows that these are a requirement of a fund fs fiduciary duty.
  • Financially material ESG issues are conflated with the ethical preference of members. While it’s right that regulations give flexibility to funds to respond to their members f ethical preferences, this is separate and distinct from the requirement to consider financially material ESG issues.
  • The drafting may give easy opt-outs to investors – using poorly defined terms, or phrases like “give consideration to” without guidance on what appropriate consideration looks like. For comply-orexplain frameworks, it fs often not clear what level of justification is required when explaining noncompliance.

Policy monitoring

  • There is inconsistency between policymakers and regulators. Governments may discuss ESG issues but financial services regulators rarely do. However, regulators often have flexibility within their mandates and may be able to respond far more quickly to emerging issues, without waiting for policy processes to run their course.
  • Very few of the policy initiatives we analysed were actively monitored. In some cases this is by design – the French Energy Transition Law has a two-year development phase before monitoring commences. In some cases, it reflects the fact that the objectives set for the policy instrument simply aren ft ambitious enough to require monitoring. However, more commonly we heard that capacity constrained regulators deprioritise ESG considerations, and in some cases don ft sufficiently understand them well enough to engage. In some cases, regulation of stewardship codes falls to industry bodies with no formal regulatory mandate and no ability to sanction non-compliance.
  • Existing monitoring is not transparent. Some regulators shared the thoughtful and considered methods they use for tracking the implementation and impact of their initiatives. However, this rarely extends to holding individual investors to account for implementation. And even in these markets, investors remained extremely sceptical of the impact . they didn’t feel they’d seen their peers and competitors change behaviour. Interviewees openly questioned whether ESG issues were a priority for the government, suggesting that ESG clauses were introduced just to respond to pressure from civil society – or even debated whether the clause in question existed.
  • Finally, the design of regulation may make it difficult to hold investors to account. Many pension fund regulations require funds to disclose their ESG policy only if they have one . it is therefore near impossible for a regulator to identify noncompliance.

“Article 173 of the Energy Transition Law and the other laws in France are effective because many actors are quite advanced, but also because there were formal laws before. France is having an iterative process and scaling up over time: regulation, market practice, regulation, market practice…”

Grégoire Cousté, Head, French SIF

 

MSCI and MSCI ESG Research contributed data and ratings information to this report

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