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Thursday, December 1, 2022

Should policymakers, the investment community, and lawyers act more progressively on sustainable finance impact? A new report says yes.

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“The PRI identifies areas where guidance and policies are insufficiently clear, potentially limiting institutional investors’ willingness or ability to pursue sustainability impact goals. We included recommendations that will empower investors to consider sustainability factors and to pursue sustainability impact goals, in particular where these are relevant to financial returns.”

Margarita Pirovska,
Director of Policy,
Principles for Responsible Investment (PRI).

The new paper from the PRI in partnership with UNEP FI and the Generation Foundation, “Legal Framework for Impact (United Kingdom): integrating sustainability goals across the investment industry” recommends UK regulators, investors and finance lawyers support a shift in investment practice to accelerate a sustainable financial system.

The PRI, in partnership with UNEP FI and the Generation Foundation, has released a new analysis of how investors address sustainability challenges, and how the UK’s legal frameworks help or hinder such efforts. The key highlights of the report are as follows:

  1. The UK is a global leader in climate action, addressing risks from 2008 through the Climate Change Act, but investment practice has not followed at the necessary pace. More clarity from policymakers is needed to enable a sustainable financial system.
  2. Investors increasingly recognize that financial returns depend on the stability of social and environmental systems. However, many investors and other financial actors are still failing to play their full role in addressing growing sustainability challenges.
  3. UK policymakers should clarify when investors should consider pursuing sustainability impact goals in line with their legal duties.
  4. Such a clarification would enable investors to systematically consider all factors relevant to financial returns. The paper also recommends clarification and updates to policies on stewardship, sustainability disclosures, and the labeling of sustainable products.

Context
The analysis in this paper builds on the 2021 report “A Legal Framework for Impact”, authored by Freshfields Bruckhaus Deringer and commissioned by the PRI, UNEP FI, and the Generation Foundation.

This report found that in the 11 jurisdictions analyzed, including in the UK, investors are permitted, and in many cases required, to consider pursuing sustainability impact goals where this would contribute to financial returns. However, the report also found that the way UK investors understand and discharge their duties may discourage them from pursuing positive sustainability impacts.

The analysis
The new paper dives deeper into the UK’s legal and regulatory framework to identify areas where guidance and policies are insufficiently clear, potentially limiting institutional investors’ willingness or ability to pursue sustainability impact goals.

It recommends policy measures that would empower investors both to consider sustainability factors and to pursue sustainability impact goals, in particular where these are relevant to financial returns.

Commenting on the paper, the PRI’s Director of Policy, Margarita Pirovska, said: “Investors in the UK remain hesitant to change their established practices and pursue sustainability impact goals, even when this is required to achieve financial objectives.”

She continued: “The PRI identifies areas where guidance and policies are insufficiently clear, potentially limiting institutional investors’ willingness or ability to pursue sustainability impact goals. We included recommendations that will empower investors to consider sustainability factors and to pursue sustainability impact goals, in particular where these are relevant to financial returns.”

Currently, the UK’s requirements on responsible investment are focused on disclosures of sustainability risks: investors must report how they manage environmental, social and governance (ESG) risks to investments, rather than if and how they tackle the sustainability impacts of their investments.

In contrast, leading investors are using a much bigger toolkit to achieve positive sustainability impacts through their investments, with asset allocation, increasingly ambitious stewardship, and engagement with policymakers all brought to bear.

The recommendations
The paper’s recommendations focus on policy measures that would empower investors to consider sustainability factors and pursue sustainability impact goals.

The paper includes three main recommendations:

  1. Clarify when sustainability impact goals must or can be considered as part of fiduciary duties of loyalty, care, and prudence.
  2. Clarify that purpose-related requirements (sometimes described as a duty to act in clients’/beneficiaries’ “best interests”) entail consideration of sustainability impact goals.
  3. Ensure stewardship powers are used to achieve sustainability impact goals.

The recommendations build on existing and planned UK regulations with the aim of accelerating the transition to a sustainable financial system. Specifically, the PRI argues that regulators and policymakers need to clarify in which cases the UK’s legal framework permits or requires institutional investors to pursue sustainability impact objectives.

Such a clarification would enable investors to systematically consider all the factors that are relevant to financial returns. The PRI also recommends clarification of policies on stewardship, sustainability disclosures, and the labeling of sustainable products.

The paper is available at https://www.unpri.org/legal-framework-impact-uk

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