Investors have a fiduciary duty to integrate financially material factors, including environmental, social and governance (ESG) factors. Meanwhile, the Paris Agreement and UN Sustainable Development Goals have ramped up investor awareness about global sustainability challenges. Investors are increasingly considering ‘impact duties’ – such as decarbonisation targets, commitments to quality of life, gender equality or integrating the impact of their investments on wider society.

The project seeks to understand and analyse how investors can manage dual duties (their fiduciary duty and sustainability impact duties) and what happens if they are in conflict.

Legal Analysis

The project will present legal analysis to support investors to assess and account for the impact of their investment decision on sustainability issues: In other words, not just how ESG issues affect the investment decision, but how the investment decision affects ESG issues in a positive or a negative way.

While there are emerging ‘pockets of excellence’ in technical understanding, including methodologies and disclosure requirements on the integration of impact in investment decision-making, fundamental legal questions remain:

  • Are there legal impediments to investors adopting ‘impact targets’—for example—that an investor’s investment activity is consistent with no more than 1.5 degrees of warming?
  • Are investors legally required to integrate the sustainability impacts of their investment activity in their decision-making processes?
  • On what positive legal grounds could or should investors integrate the realisation of the SDGs in their investment decision-making?

In October 2019, The Generation Foundation, UNEP FI and the Principles for Responsible Investment (PRI) appointed the leading law firm Freshfields to analyse whether and how legal frameworks allow for investors to consider sustainability impact across 11 jurisdictions: Australia, Brazil, Canada, China, European Union, France, Japan, Netherlands, South Africa, United Kingdom and United States. The project reference group of experts will also support testing the legal analysis.

Responsible Investment Evolution

  • The first generation of responsible investment

In the 2000s, investors begun to understand the importance of ESG issues to their investment decisions. This was best articulated by the 2005 Freshfields report, which found that investors can incorporate financially material ESG issues as part of their fiduciary duties. The report led to the launch of the PRI.

  • The second generation of responsible investment

Despite growing awareness of responsible investment, there remained an implementation gap, with capital markets often not accounting for the sustainability-related risks and opportunities associated with issues such as climate change; a good example is the launch of the FSB’s Task Force on Climate-related Financial Disclosures.

Fiduciary Duty in the 21st Century clarified that incorporating ESG issues is a requirement of fiduciary duties, given the financial materiality of ESG issues. ESG integration is not just permissible but required.

Financial regulators in the EU, UK, South Africa, Brazil and Ontario begun to clarify ESG requirements in legislation.

  • The third generation of responsible investment

The third generation of responsible investors are beginning to measure, account for and integrate the real-world sustainability impact of their investment activity.

However, as currently defined, fiduciary duties do not require a fiduciary to account for the sustainability impact of their investment activity, beyond its financial performance. In other words, fiduciary duties require consideration of how sustainability issues affect the investment decision, but not how the investment decision affects sustainability issues.