Tuesday, July 14, 2009

UN Report On ESG Legal Responsibility Of Institutional Investors

Jul 14: A release from the United Nations Environment Programme (UNEP) indicates that a powerful group of asset managers, representing around $2 trillion (USD) in assets under management, are arguing that integrating environmental, social and governance (ESG) considerations into investment decisions is no longer just a luxury, but a legal responsibility. The case, outlined in a new report with the UNEP, underlines how the world's largest institutional investors -- such as pension funds, insurance companies, sovereign wealth funds, mutual funds and foundations -- have a central role in assisting the transition to a low carbon and resource efficient Green Economy.

The report indicates that professional investment advisors and service providers -- such as investment consultants and asset managers -- to institutional investors may have a far greater legal obligation to incorporate ESG issues into their investment services or face "a very real risk that they will be sued for negligence" if they do not. The 120-page report has been produced by the Asset Management Working Group of UNEP Finance Initiative (UNEP FI), a unique partnership between the UN's environmental arm and over 180 financial institutions worldwide. The report also provides indicative legal language that can be used to embed ESG considerations in the investment management agreements and related legal contracts between institutional investors and their asset managers.

The new 2009 report -- UNEP FI "Fiduciary II" - Fiduciary Responsibility - Legal and Practical Aspects of Integrating Environmental, Social and Governance Issues into Institutional Investment -- is a follow-up and update to an earlier 2005 report (i.e. Fiduciary I).

Achim Steiner, UN Under-Secretary-General and UNEP Executive Director, said, "The significant environmental investments underpinning the current multi-trillion dollar stimulus packages are signaling the determination of some governments to make a transition to a more sustainable, 21st century economy. As investors return to the markets, the question remains whether the funds will only go to the brown economy of yesterday -- or to a new Green Economy. Market signals, creative market mechanisms and other signals and incentives can play a transformational role. This report also makes a powerful legal case for leadership in this area, underscoring the considered opinion of an influential group of asset managers that ESG issues are not peripheral but should be part of mainstream investment decision-making processes across the industry."

The report contains a message from the Asset Management Working Group which indicates, in part, ". .. with times of unusual crisis often come extraordinary moments of opportunity. For this reason, many of us in the field of responsible investment believe that the financial meltdown actually represents a unique opportunity to ‘recast’ some of the most basic tenets of fiduciary investment. After the fallout of the crisis, many fiduciaries will wisely look at the impact of the crisis on their investments, and look for new approaches to steward and allocate their assets."

The new UNEP FI report is released the day before the Principles for Responsible Investment (PRI) Annual Event in Sydney, Australia, which will convene many of the world's largest institutional investors and where the report's findings will be deliberated. Over 560 institutions from the global investment community, representing more than US$18 trillion in assets, have now signed on to the PRI, an initiative incubated by UNEP FI and the UN Global Compact between 2003 and 2006. The PRI was launched in 2006 by then UN Secretary-General Kofi Annan and endorsed in 2007 by current UN Secretary-General Ban Ki-moon.

The PRI is an investor initiative in partnership with UNEP FI and the UN Global Compact. Convened by UNEP FI and the UN Global Compact, the PRI was established as a framework to help investors achieve better long-term investment returns and sustainable markets through better analysis of environmental, social and governance issues in the investment process and the exercise of responsible ownership practices (See contact below).

Access a lengthy release from UNEP with extensive quotes from report authors and links to additional information (
click here). Access the new Fiduciary II report (click here). Access the Fiduciary I report (click here). Access the PRI website for more information (click here). Access the PRI conference website for further details (click here).