The UK’s legal framework limits investors’ ability to pursue sustainability impact objectives as an ultimate end, rather than in support of financial objectives.

And UK investors could be discouraged from pursuing positive sustainability impacts or even considering doing so, by the way in which they understand and discharge their duties.

These conclusions come from ’UK: Integrating sustainability goals across the investment industry’, a report from the Principles for Responsible Investment (PRI), in partnership with the United Nations Environment Programme Finance Initiative and the Generation Foundation.

The paper explores how UK policymakers could mainstream responsible investment more clearly, helping the country achieve its climate and other sustainability goals.

It builds on last year’s report commissioned from Freshfields Bruckhaus Deringer (FBD), which found that in the 11 jurisdictions analysed, including the UK, investors are broadly permitted to consider pursuing sustainability impact goals where this would contribute to their financial return objectives.

The jurisdictions included France, The Netherlands and the EU, as well as Australia, China and the US.

This legal analysis concluded that:

  • financial return is generally regarded as the primary purpose for investors;
  • investors generally have a legal obligation to consider pursuing sustainability impact goals where that can help achieve their financial objectives;
  • in some circumstances, investors can pursue sustainability impact goals for reasons other than achieving financial return goals (ie, as an ultimate end);
  • investors are legally required to pursue improved sustainability impacts if the objective of the financial product commits them to doing so.

However, PRI’s own analysis in the new report shows that many UK investors are still hesitant to change their established practices and pursue sustainability impact goals, even when this is required to achieve financial objectives.

The report said the UK’s existing requirements on responsible investment are focused on disclosures of sustainability risks; investors must report how they manage ESG risks to investments, rather than if and how they tackle the sustainability impacts of their investments.

In contrast, leading responsible 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 report examines relevant aspects of the UK’s legal and regulatory framework, and identifies areas where guidance and policies are insufficiently clear, potentially limiting institutional investors’ willingness or ability to pursue sustainability impact goals.

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

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

The report also suggests policy areas for further consideration:

  • guidance for pension schemes on assessing relevance of social and environmental goals;
  • sustainability-related disclosures and labelling/classification of sustainable investment products;
  • competition law;
  • options to enable consideration of certain sustainability impact goals and of individual investors’ views on sustainability.

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