- DOL: Economically Targeted Investments (ETIs) and Investment Strategies that Consider Environmental, Social and Governance (ESG) Factors
- UNPRI: Addressing ESG factors under ERISA
- UNEP FI: Fiduciary Duty in the 21st Century
- OECD: Prudent Person Rule
Investment strategies vary according to organizational objectives, expectations, and purpose. Likewise, strategies to generate value from ESG can vary substantively.
To determine what approach is most relevant to them, investors and organizations must consider:
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Fiduciary duty – the legal responsibility of those who manage money on behalf of others to act in the interests of beneficiaries – is a dynamic concept that can vary by locality, though underlying expectations remain the same: fiduciaries must be loyal to their beneficiaries and carry out their duties in a prudent manner. In general, OECD countries with an Anglo-American legal tradition have a standard requiring due care, diligence, and investing as an “ordinary prudent person” would do.
The beliefs, policies and processes that inform investment decisions must be grounded in fiduciary duty, which means it is essential to have appropriate policies in place that account for material factors - including ESG. This point has been reinforced in recent years, with an increase in legal clarifications and regulations referencing ESG worldwide, as well as ESG disclosure requirements for asset owners and investment managers.
Large-scale trends such as climate change, resource scarcity, changing demographics – in addition to a realignment of norms and stakeholder expectations – means it is no longer possible to consider ESG issues as “non-financial” factors. An emerging global consensus now sees ESG as an essential consideration in prudently carring out fiduciary responsibilties.
To meet this goal, it is essential to have in place overarching beliefs that clearly articulate objectives and relevant considerations. These can then be used to guide the formation of robust policies and effective processes.
An investment strategy is predicated by investment beliefs, which reflect long-term views of how capital markets operate and value generated. Articulating beliefs regarding ESG and sustainability serves to broaden perspectives on long-term risks and opportunities and sets the foundation for an effective approach. These ESG policies and frameworks guide an investment strategy that is less reactive and more adaptive to changing market conditions.
ESG should be considered as an essential aspect of generating value throughout the investment processes – not as a standalone element bolted on as an afterthought, but embedded throughout operations. ESG is a foundation for value, and while a clear commitment to ESG must be made at the highest levels of an organization (Trustees/Board), the values that the beliefs and policies embody must be aligned with the objectives and goals of all relevant stakeholders.
The following section outlines some examples of practical strategies that can be used to operationalize ESG:
It is also important to consider which frameworks are used to report on and communicate ESG activities both internally and externally.
Effective communication efforts inform stakeholders how their concerns are being addressed; allows for clear expectations regarding your priorities to investees, investment managers, policymakers, and other stakeholders; and supports the growth of sustainable investing as a whole through greater transparency and opportunities for peer-to-peer benchmarking.
Some questions that need to be considered in reporting and communications include:
To be successful in generating value from ESG principles, it is essential to: