The European Commission steps up
Today, the 13th of November, the European Commission launched a public consultation on providing legal clarification that the legal duties (sometimes referred to as fiduciary duties) of asset owners and asset managers include integrating Environmental, Social and Governance (ESG) considerations into decision-making. This move recognises the need for more clarity, further accountability and the willingness of the European policy-makers to bring consistency in a financial system able to sustainably feed the real economy.
The consultation can be found here and will be open until the 22nd of January 2018.
Eurosif Policy Position on the Capital Markets Union Action Plan
Eurosif has been relentlessly calling for action with regards to the understanding of fiduciary duty that would clearly reference Environmental, Social and Governance criteria. The ‘prudent person principle’ in investment, known as ‘fiduciary duty’ in some jurisdictions, is the moral obligation of investors to act in the best interests of beneficiaries.
In 2015, in our Capital Markets Union Action Plan, Eurosif called for a clear definition of the concept of fiduciary duty, too often interpreted by investors and investment advisors as a duty to maximise short-term financial return. As climate and wider ESG risks are material to business, we believe that acting in the beneficiaries’ best interest means having a long-term approach to business and fully factoring in ESG issues in investment decisions. Asset managers and institutional investors, who are naturally interested in maintaining high portfolio returns, should be able to ensure that ESG risks in their portfolios are properly measured and managed. Therefore, we urged policy-makers to develop a clear definition of fiduciary duty as requiring a long-term approach on investment, with full consideration of ESG risks. Interesting findings had already been made available in the UN report ‘Fiduciary Duty in the 21th Century’, which shows that integrating ESG issues into investment research and processes are tools to enable investors to make better investment decisions and improve investment performance consistent with their fiduciary duties.
The issues at stake
The European Commission heard the call from the High Level Group of Experts on Sustainable Finance (HLEG) and seized the momentum to set a clear framework around investors duties which clearly recognise sustainability, its challenges and opportunities. With our biennial survey, Eurosif captures the size of the SRI market – which in 2016 exceeded €11 trillion of total assets invested according to SRI strategies. Purely ESG integration was one of the fastest mainstream strategies last, reaching over €2.6 trillion. This clearly indicates a vast appetite for this strategy, which reflects in a balanced way the call for responsible investing.
The HLEG Interim Report clearly recognised the extent to which ‘the responsibility of directors and investors to manage long-term sustainability risks should be enshrined in their duties, whether it is through fiduciary duty in common law or its equivalent in other legal systems. Updates should make clear that managing ESG risks is integral to fulfilling these duties. Policy and regulatory interventions will also have to promote the advancement of market-based tools essential to investment decision-making, such as benchmarks and credit ratings’.