UN to investors: the world is in your hands

Fiduciary responsibility: Legal and practical aspects of integrating environmental, social and governance issues into institutional investment, by the Asset Management Working Group of the United Nations Environment Programme Finance Initiative, draws a line in the sand for institutional investors and their advisors, challenging them to use their considerable power to effect change through their investments.

At the top of the group’s action list is what it refers to as the “natural resources crisis,” and the report suggests that responsible investing would have a threefold effect:
– It would make a major contribution to reviving the world economy, saving and creating jobs, and protecting vulnerable groups;
– It would reduce carbon dependency and ecosystem degradation, putting economies on a path to clean and stable development; and
– It would encourage sustainable and inclusive growth and end extreme poverty by 2015.

The report calls for the general adoption of the Principles of Responsible Investment, (PRI)—which were developed in 2006 in conjunction with the UN— along with several legal actions to be implemented in order to bring about change:

1. Advisors to institutional investors should have a duty to proactively raise ESG issues within the advice that they provide, and that a responsible investment option should be the default position.

“Responsible investment, active ownership and the promotion of sustainable business practices should be a routine part of all investment arrangements, rather than the optional add on, which many consultants appear to treat it as,” states the report’s authors.

2. All asset manager and asset owner signatories to the PRI should be required to embed ESG issues in their legal contracts and should commit to integrating such issues into investment analysis.

3. All consultant, asset manager and other service provider signatories to the PRI should make a commitment to proactively raise ESG issues within their advisory and client take-on process.

The report argues that the most important aspect of the PRI is that institutional investors—who collectively represent approximately US$18 trillion in assets under management to date—have endorsed Principle 4, which states: “We will promote acceptance and implementation of the principles within the investment industry, including possible concrete actions such as incorporating principles-related requirements in requests for proposals and aligning investment mandates, monitoring procedures, performance indicators and incentive structures accordingly.”

“The key question is whether these current trends among fiduciaries, along with commensurate actions from policymakers and civil society institutions, will reach a tipping point where the asset management industry is sufficiently engaged to help avert the natural resources crisis,” says the report.

“Some have argued that the ongoing financial crisis may not have been so deep or so protracted if institutional investors had been collectively willing to challenge the financial institutions that were at the heart of creating the systemic risks within the financial system. We also believe that one of the most important lessons from the crisis is that institutional investors’ responsible ownership needs to be strengthened in order to be fit for purpose.”

Read the report here.

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