LEGAL OBLIGATIONS of fund managers to maximise the financial return for beneficiaries do not prevent the consideration of environmental, social and governance (ESG) issues when making investment decisions.
This was a key finding of a report released last week by the United Nations Environment Program Finance Initiative (UNEP FI) to address whether the law “voluntarily permitted, legally required or hampered” the integration of ESG issues into investment policy.
Blake Dawson Waldron (BDW) lawyers wrote the Australian chapter of the report, “A Legal Framework for the Integration of Environmental, Social and Governance Issues into Institutional Investment”. Covering nine countries, and therefore nine different jurisdictions, it found that contrary to popular belief, funds mangers are not only entitled to consider ESG issues, but in some cases, may be breaching their legal duties if they fail to do so.
Senior associate in BDW’s environment practice, Sarah Carlisle, said the nature of the fund industry in Australia, and the nature of regulation and duties that apply to fund managers, had been examined in the context of superannuation funds, managed or mutual funds and life insurance reserves. Carlisle co-wrote the chapter with funds lawyer Judilyn Beaumont.
“We looked at the nature of the funds industry, the amount of money invested in those sectors, and a broad description of the regulatory regime that applied to those funds, and the duties the funds owed to their members,” she said.
The pair was unable to locate any Australian case law that dealt with the question, but Carlisle said there was a considerable amount of commentary about how those issues were developing and being taken up in the industry. The available commentary concluded that the Australian courts would be likely to follow English courts on the matter.
“Our fiduciary duties are derived from the English courts and are common to all common law jurisdictions,” Carlisle said.
She said it was “exciting” to be involved in the report, which was commissioned by Freshfields Bruckhaus Deringer.
The international firm has offices in seven of the jurisdictions included — the UK, US, France, Germany, Italy, Spain and Japan — but outsourced the chapters on Australia and Canada.
Carlisle said she had previously spent three years at Freshfields, where she worked with Paul Watchman, the partner who oversaw the project. “They contacted me to see whether I was interested in helping out.”
She leapt at what was a “fairly rare opportunity” to look at the big picture policy issues. “This was the first time a really comprehensive analysis of the state of the law [has been undertaken] in relation to those issues.
“There is plenty of commentary about how the issues are developing and being taken up in the fund industry, but nothing much answering that specific question of whether the law helps or hinders taking those considerations into account,” Carlisle said.
Carlisle would like to see the issue adopted more comprehensively by the fund industry, and said the report would add weight to the importance of ESG considerations.
Because of the fund industry’s “massive” size, it had the potential to influence the way corporate structures behave by refusing to invest in companies with bad environmental and social records, she said.