Download Fiduciary Duty and ESG: Maximizing Long-Term Investment Returns and Social Responsibility and more Study Guides, Projects, Research English in PDF only on Docsity! Fiduciary Duty Fact Sheet for Investors The History In many jurisdictions, fiduciary duty has been widely interpreted as the obligation of trustees and other fiduciaries to maximize investment returns. It arose from concerns that trustees would put their personal interests ahead of their beneficiaries. Legally, this interpretation was confirmed in 1985 in Cowan v Scargill, an English trusts law case, which established that trustees cannot ignore the financial interests of their beneficiaries. For nearly two decades the outcome of that case was that pension fiduciaries around the world neglected environmental, social and governance (ESG) risks in the selection and management of investments. The result was that the focus was on short-term rather than long-term returns. This interpretation of fiduciary duty has been widely challenged in recent years. ESG Considerations A significant body of research has determined that ESG issues have a material impact on long-term investment returns. In 2005, the Freshfield’s report concluded that “… integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and arguably required in all jurisdictions.” They went on to say that, “In our opinion, it may be a breach of fiduciary duties to fail to take account of ESG considerations that are relevant and to give them appropriate weight, bearing in mind that some important economic analysts and leading financial institutions are satisfied that a strong link between good ESG performance and good financial performance exists.” After the report was released, in 2006, the Principles for Responsible Investment (PRI) were launched by the UN and since then more than 2200 pension funds and other institutional investors representing more than $89.6 trillion have become signatories to the principles. The Legal Question A 2018 report by United Nations Environmental Programme Finance Initiative (UNEP FI) stated that the modern interpretation of fiduciary duty includes “the consideration of ESG issues in investing decision-making.” One of the most important developments in the regulatory space is seen in Europe, where they are currently evolving their fiduciary duty to include ESG integration as a part of their regulatory requirements. As a result from the recommendations from the High-Level Expert Group on Sustainable Finance, the European Commission released a proposal to clarify investors’ legal duty to consider sustainability factors in investment decisions. In the words of United Nations Secretary-General Ban Ki- moon after the 2008 financial crisis: “Some have argued that the ongoing financial crisis may not have been so deep or so protracted if institutional investors had been collectively willing to challenge the financial institutions that were at the heart of creating the systemic risks within the financial system. We also believe that one of the most important lessons from the crisis is that institutional investors’ responsible ownership needs to be strengthened in order to be fit for purpose. In conclusion, we believe that the global economy has now reached the point where ESG issues are a critical consideration for all institutional investors and their agents.” !
