Global statement on investor obligations and duties: explanatory notes

In January 2016, the Principles for Responsible Investment (PRI), the United Nations Environment Programme Finance Initiative (UNEP FI) and The Generation Foundation launched a three year project to clarify investors’ obligations and duties in relation to the integration of environmental, social and governance issues in investment practice and decision-making.

This follows the publication in September 2015 of Fiduciary Duty in the 21st Century by the PRI, UNEP FI, UNEP Inquiry and UN Global Compact.

The project has three reinforcing components:

Working with investors, governments and intergovernmental organisations to develop and publish an international statement on investor obligations and duties, which encourages the integration of ESG issues into investment processes and practices.
Publishing and implementing roadmaps on the policy changes required to achieve full integration of ESG issues in investment processes and practices across eight countries (US, Canada, Germany, UK, Japan, Australia, South Africa and Brazil).
Extending the research into fiduciary duties – and, more broadly, investor obligations and duties – to five major Asian markets: China (including Hong Kong), India, Korea, Malaysia and Singapore.

Current Practice on Investor Obligations and Duties

Based on in-depth assessment in eight countries (US, Canada, Germany, UK, Japan, Australia, South Africa and Brazil), Fiduciary Duty in the 21st Century concluded that “Failing to consider long-term investment value drivers, which include ESG issues, in investment practice is a failure of fiduciary duty”. It also acknowledged that despite significant progress, many investors have yet to fully integrate ESG issues into their investment decision-making processes. The report recommended that standards of practice across the investment industry be raised in two areas:

The integration of ESG issues into investment practices and decision-making. Despite significant progress many institutional investors do not systematically integrate ESG issues into their investment processes, and relatively few engage with the companies or entities in which they are invested. This is despite growing evidence that these are important drivers of investment performance.
The obligations that investment organisations owe to their beneficiaries and clients. The global financial crisis demonstrated that standard investment practices were inadequate to protect clients and beneficiaries from significant financial losses resulting from systemic risks and low probability/high consequence events.

In both cases, interviewees for the Fiduciary Duty in the 21st Century report pointed to weaknesses in policy frameworks and to weaknesses in the interpretation and implementation of policy as barriers to progress.

The Need for Policy Clarification

There is growing policy action on ESG issues. For example, an increasing number of countries require institutional investors to adopt and publish policies on ESG issues and to report on the implementation of these policies. Many have also introduced mandatory reporting requirements for companies, significantly improving the quantity and quality of information that is available to investors. Despite this, many countries remain hesitant to take action in this area. There are various reasons:

The desire not to disadvantage domestic companies through the imposition of additional regulatory requirements.
The reluctance to take a position that leads to national policy diverging significantly from international practice.
The perception that ESG issues are not important to investment practice and performance.
The assumption that appropriate investment behaviours flow inevitably from existing market and regulatory pressures (and do not require explicit regulatory signals).

The lack of regulatory action has been interpreted by many investors as a signal that ESG issues are not important to short and long-term investment performance, and as a signal that investors have limited responsibility for the wider social, environmental or economic consequences of their activities.

The Purpose of the Investor statement

The purpose of the investor statement is therefore to:

provide governments with the confidence to act, knowing that other countries are also taking action;
provide consistency between countries by clarifying that the duties of loyalty, prudence and competence apply to all investors and, and by clarifying that investors must pay attention to long-term investment value drivers, including ESG issues, in their investment processes, in their active ownership and voting activities, and in their public policy engagement.

Launch and Next steps

This statement will be launched on Wednesday 29 June 2016 at Palais Brongniart and it is expected to be supported by a range of investors, including asset owners, investment managers and other investment organisations.

The statement will enable the PRI and UNEP FI to work with international and supranational organisations to implement an international policy instrument clarifying investor obligations and duties, as well as national policy makers to support implementation in different jurisdictions.