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Does the Law require or permit Sustainable Investing?

Summary

A ground-breaking global legal analysis found that while there are differences across jurisdictions and investor groups, where investing for sustainability impact approaches can be effective in achieving an investor’s financial goals, the investor will likely be required to consider using them and act accordingly.

At the same time, "ESG investing" is classified as insufficient. The principle of "intention for positive sustainable impact", as it is also advocated by Globalance, is deemed to be equally legally compliant.

"This detailed, global legal analysis demonstrates that investors should feel empowered to set impact goals and measure progress against them." Al Gore and David Blood, The Generation Foundation

What is it about

A ground-breaking legal analysis, authored by the law firm Freshfields Bruckhaus Deringer, determined the extent to which legal frameworks enable investors to consider impact in their activities across 11 jurisdictions: the EU, Australia, Brazil, Canada, China, France, Japan, South Africa, the Netherlands, UK and the US.

The lawyers have asked whether the law as it stands in those jurisdictions requires or permits institutional investors, specifically pension and mutual funds and insurers and their investment managers, to tackle sustainability challenges in discharging their legal duties and exercising their discretions: does the law do so in order to enable them to realise a financial return, and does it do so in a way that allows them to treat resolving some sustainability challenges as an end in itself?

Two main conclusions have been reached:

First, if an asset owner or investment manager concludes, or on the available evidence ought to conclude, that one or more sustainability factors poses a material risk to its ability to achieve its financial investment objectives, it will generally have a legal obligation to consider what, if anything, it can do to mitigate that risk (using some or all of investment powers, stewardship, policy engagement or otherwise) and to act accordingly.

Second, investments with an explicit sustainable impact goal are also permissible in most relevant jurisdictions in some shape or form, subject to compliance with consumer protection safeguards.

Why is it important

Up until 2005 legal obligations to prioritize financial returns at all costs was an often-heard argument by mainstream institutional investors who were dismissing sustainable investing. It was the first “Freshfield Report” on investor duties for the United Nations Finance Initiative, UNEP FI, who marked the change of this paradigm.

Now, this sequel covering a much broader range of 11 important jurisdictions is confirming its conclusions and goes much further. As its title “A Legal Framework for Impact” suggests, it provides detailed guidance and definitions to all relevant investment strategies commonly included in “sustainable investing”. And, crucially, it also presents a global roadmap for policy changes needed to facilitate faster and more systemic shifts of capital towards sustainable impact.

The Globalance View

Globalance has always seen relevant sustainability principles as integral to financial investment success. Hence, this message of the report comes hardly as a surprise. It is another aspect which we consider even more important. One, which many actors are well advised to take note:

The authors have included an implicit challenge to current interpretations of “ESG” investing labelling them as too narrow: “…in isolation, they do not involve the investor intentionally seeking to bring about assessable changes in the behaviour of investee enterprises and others.” Instead, the report makes a strong case for “ultimate ends” sustainable investing. Critically, this ‘conceptual net’ intends to catch, broadly, any activities that involve an investor intentionally attempting (through the activities it finances or otherwise) to influence the behaviour of investee enterprises and other third parties in assessable ways that can help to achieve overarching sustainability outcomes.

Globalance has been built on exactly this ambition for investing with a purpose to achieve positive sustainable impact. It is valuable that the legal arguments for this approach are convincingly presented.

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