Groundbreaking work to assess real-world sustainability impact for investors

LONDON – Today the Principles for Responsible Investment (PRI), United Nations Environment Programme Finance Initiative (UNEP FI) and The Generation Foundation announced the launch of pioneering research with global law firm Freshfields Bruckhaus Deringer LLP (‘Freshfields’) to analyse whether and how legal frameworks allow for - and incentivise - investors to consider sustainability impact across major markets.

The Paris Agreement and UN Sustainable Development Goals (SDGs) have ramped up investor awareness about global sustainability challenges, with investors increasingly thinking about sustainability impact, such as decarbonisation targets.

The research – A Legal Framework for Impact – will explore existing legal frameworks to analyse the extent to which asset owners can prioritise sustainability impact, including where this may lead to a negative effect on investment return. In the case of investment managers, it will explore how they can or should address sustainability impact where their investment mandate is silent on sustainability impact.

While there are emerging pockets of excellence in technical understanding, fundamental legal questions remain, for example: on what legal grounds can an investor set objectives for increasing the positive and/or reducing negative sustainability outcomes within its portfolio? And, where an investor is required to disclose the sustainability impact of its investment activity, can this create a liability for the investor if the impacts are negative?

This research will also help to establish the extent to which legal frameworks allow and incentivise investors to take wider society and quality of life in retirement into consideration, and as such, the extent to which impact may be incorporated into investment decision-making.

Jurisdictions covered will be the EU, Australia, Brazil, Canada, China, France, Japan, South Africa, Netherlands, UK and US. The project is supported by a reference group of experts in the law, responsible investment and sustainability impact.

“Investing for sustainability impact is the new frontier for responsible investment, with a stronger focus on how investment decisions have real world impact on ESG factors over financial materiality. This is an exciting and new area of work for PRI which will help investors across a number of markets ensure sustainability is a fundamental part of their investment practices. We’re delighted to be partnering with UNEP FI, Generation Foundation and Freshfields on this important work” PRI CEO Fiona Reynolds said.

“This project will provide recommendations that have not previously been formulated. It presents a unique opportunity for investors to better align economies and industries in transition with the climate targets and the UN Sustainable Development Goals. We believe this project will be key to influencing investor practice such that, within the next decade, assessing and managing the contribution of investment decisions to sustainability impacts becomes a core part of investment activity” UNEP FI Head Eric Usher said.

“Generation Foundation is pleased to support the work of PRI and UNEP FI. The challenges facing the world today are extraordinary and unprecedented. Climate change, poverty and rising inequality are increasingly ubiquitous. If the finance industry is to be part of the solution, accounting for the impact of investment decisions on sustainability must be a core part of investment activity. This work will highlight the path to the transformational change needed to meet the Paris Agreement and Sustainable Development Goals,” Senior Partner of Generation Investment Management David Blood said.

“The sheer number of regulations in hard and soft law across these eleven jurisdictions that may restrict, guide or influence asset owners and asset managers in their investment activities make it difficult to navigate the legal landscape to invest for sustainability impact. This is why this project is so welcome.” General Counsel for AP2 and member of the Reference Group for the project Martin Jonasson said.

“This is an important initiative and one which has not yet been undertaken as comprehensively as this project intends to do. Questions around legal and regulatory impediments to investing for sustainability impact will highlight actions to be taken by asset owners, their agents and also policy-makers. It comes at a time when a new harmonized regulatory framework is about to be realized across the laws impacting EU asset managers, their products, services and investment decision making processes.” Managing Director of Goldman Sachs Asset Management and member of the Reference Group for the project Daniel Jackson said.

“Climate change, waste, resource scarcity and inequality are placing a significant and growing strain on societies around the world. The need to address them is urgent, and effective allocation of investment is a key way in which individuals and businesses can do so. We are delighted to have been given the opportunity to work on this exciting project and to build on our 2005 report” Partner at Freshfields David Rouch said