OPINION | In the year ahead, there will be new policymakers and new priorities in many countries, making it more important than ever that investors take the lead in helping to set the sustainability agenda.

At the Principles for Responsible Investment (PRI), we have long believed that institutional investors should use their considerable financial strength to influence policymakers on environmental, social and governance (ESG) considerations. Managing ESG risks contributes to improved returns for investors and has a positive impact on the long-term health of financial markets.

In the past, investors typically waited for governments to act first on such issues. Happily, we’ve seen this mindset change in recent years. The COP21 meeting, held in Paris in late 2015, marked the first time global investors made their voices heard in overwhelming numbers on the importance of tackling climate change.

But most institutional asset holders still are not doing enough to take ownership of the responsible investment agenda.

Sitting atop the investment chain, institutional asset owners are integral to driving responsible investment forward and should be taking the lead on this issue. These organisations should scrutinise and address the barriers holding them back from a truly long-term approach to investing.

How the boards of superannuation funds structure their own agendas, and measurements of success, can lead their internal and external investment managers to act with better regard for long-term outcomes.

Trustees should be asking fund executives what they are doing to screen for ESG risks and how they are monitoring the risk management of their external fund managers.

To support asset owners with their ESG integration, the PRI recently published the report Investment Policy: Process & Practice: Asset Owner’s Guide to Complete ESG Incorporation, which provides concrete, step-by-step guidance on how asset owners should be integrating ESG.

The new guide is aimed at public and corporate pension funds, superannuation funds, insurance companies, endowments, foundations and family wealth offices. It is designed to help them revise their investment policy to incorporate all long-term factors, including ESG considerations.

Clarifying asset owners’ fiduciary duties is also critical for moving ESG forward. In particular, there should be no doubt that investors should explicitly account for ESG issues in their investment analysis and decision-making, and in their engagement with companies and issuers.

In 2015, the PRI, United Nations Environment Programme Finance Initiative, and The Generation Foundation launched Fiduciary Duty in the 21st Century. This examined fiduciary duty across eight key markets: the US, the UK, Germany, Canada, Brazil, South Africa, Australia and Japan. The report concluded that considering sustainability as part of the prudent management of capital is not only important to upholding fiduciary duty, it is obligatory.

Following on from this work, a roadmap for each country has been published, which includes views from investors, policymakers and lawyers. The country roadmaps make a series of recommendations, covering both policy and practice, that will allow fiduciaries to fully integrate ESG risks.

In addition to clarifying definitions around fiduciary duty, the PRI is also taking steps to address barriers to ESG across the broader financial sector. The organisation’s mission calls for it to promote a sustainable global financial system that supports long-term value creation and benefits the environment and society as a whole.

As part of a recent consultation, we identified 30 underlying conditions that could cause the financial system to fail to support sustainable economic development and undertook to prioritise the most prominent causes. We looked at areas that play to our strengths, and where we can match our ambitions with our resources and expertise.

Following that 2016 consultation, we have prioritised the nine key obstacles we will focus on in our work in 2017:

  1. Short-term investment objectives
  2. Attention to beneficiary interests
  3. Policymaker influence on markets
  4. Capture of government policy by vested interests
  5. Influence of brokers, ratings agencies, advisers and consultants on investment decisions
  6. Principal-agent relationships in the investment chain
  7. Cultures of financialisation and rent-seeking in market actors
  8. Investment incentives misaligned with sustainable economic development
  9. Investor processes, practices, capacities and competencies

This article first appeared in the February print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.

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