The EU has taken an important step forward on advancing sustainable finance. On Thursday 7 March 2019, the EU Parliament and Council achieved political agreement on requiring ESG integration by financial market participants. Clarifying the fiduciary duties of investors has been a priority for UNEP FI for many years.
These rules are an essential part of EU efforts to make the financial sector a powerful actor in fighting climate change and meeting the sustainable development goals by further aligning the industry with the Paris Agreement and the UN 2030 Agenda for Sustainable Development. The EU aims to “connect finance with [the] needs of the real economy”.
This latest EU development represents a major milestone from a regulatory standpoint. The new regulation will provide consistency across EU member states by clarifying that duties require investors to consider financially material environmental, social, and governance (ESG) factors in their investment decision-making. It also sets out how financial actors should inform beneficiaries about their compliance with the integration of ESG risks and opportunities. This will apply to private and occupational pension funds, insurance funds, portfolio management and investment advisors.
Notably, the document includes:
- Reference to the SDGs and Paris Climate targets – explicitly linking financial regulation to global sustainability objectives.
- Use of the word “must” – financial market participants “must” integrate ESG.
- Use of the word opportunities – ESG risks and “opportunities”.
- Requirements to disclose, and importantly, requirements to disclose the adverse impact of ESG matters. This would be the first regulatory-backed disclosure framework for sustainability impact of investment activity.
UNEP FI has been calling for EU clarification of investor duties since the launch of Fiduciary Duty in the 21st Century, and more specifically through the Global Statement on Investor Obligations and Duties signed by 122 investors from 22 countries.
Investor duties, known in common law markets as fiduciary duties, were once considered a barrier to responsible investment. Some institutional investors believed that ESG issues were not relevant to portfolio value and were therefore not consistent with their investor duties. This assumption is no longer supported.
The Fiduciary Duty in the 21st Century project (a partnership between UNEP FI, the PRI, and The Generation Foundation) has contributed an extensive evidence base to end the debate on whether fiduciary duty is a legitimate barrier to the integration of ESG issues in investment decision-making. The project concluded that there are positive duties on investors to integrate ESG issues: failing to consider ESG issues in investment practice is a failure of fiduciary duty. With the new regulation, this will now be clarified in EU law.
The manner in which investor duties are defined has profound implications. Decisions made by fiduciaries cascade through the investment chain affecting decision-making processes, ownership practices, and ultimately, the way in which companies are managed.
The EU’s new rule will allow investors and citizens to make more informed decisions in support of sustainability. UNEP FI strongly welcomes this development and commends the political leadership of EU policy makers.
Explore Fiduciary Duty in the 21st Century and evidence for the modern interpretation of fiduciary duty here.