Responsible investing should be a fiduciary duty

Investing with environmental, social and governance considerations in mind does not necessitate an unattractive shrinking of your investment universe. Nor does it demand sacrificing financial returns.

Fiduciary duty is not a hindrance to ESG integration

There is no legal barrier either. The Law Commission, in its report on the ‘Fiduciary Duties of Investment Intermediaries’, stated: “There is no impediment to trustees taking account of environmental, social or governance factors where they are, or may be, financially material.”

In short, fiduciary duty is not a hindrance to ESG integration. I would go further than that: effectively managing ESG issues is a core part of the fiduciary duties owed by asset owners to their beneficiaries.

ESG implementation lags ambition

Investors who ignore how investment practices impact and interact with ESG factors can misprice risk, leading to poor decisions.

Yet research shows even an engaged group of investors, namely signatories to the Principles for Responsible Investment, are struggling to make asset allocation decisions based on the belief that ESG integration is important.

A 2017 Snapshot Report from the PRI, detailing findings from 1,248 signatories, found that 90 per cent of asset owners have a policy for their overall responsible investing approach, and more than 60 per cent have a voting, engagement and/or screening policy.

Despite the strong intentions of these asset owners the PRI’s survey found that implementation lags ambition. Less than half have formalised guidelines for ESG factors. For sector-specific responsible investing guidelines, this is just 15 per cent.

A quarter said ESG risks affect how they allocate between asset classes. Less (20 per cent) use ESG risks to apply sector weighting and allocate assets between geographies. But the PRI report found it is rare for asset owners to consider ESG factors when determining fixed income duration, despite most investing in such assets.

Better reporting and collaboration are needed

In our experience, the struggle to make asset allocation decisions based on ESG factors is even more problematic for the wider group of defined benefit and defined contribution schemes, many of which have limited resources and depend on advice from their consultants.

Moving to acceptance of ESG as a fundamental part of the process rather than special, additional or client-specific is key to breaking down the barriers between having a policy and making meaningful asset allocation decisions.

Meaningful and vastly increased levels of collaboration are required between consultants, asset managers and the legal profession – better reporting, better collaboration, better understanding.

Institutional investors have a duty to act in the best long-term interests of their beneficiaries. Consultants and other advisers must strive to provide advice that supports this aim.

The reward is both personal and public: long-term, responsible investment that benefits the environment and society as a whole.

Lydia Fearn is head of defined contribution and financial wellbeing at consultancy Redington