Sustainable investing a fiduciary duty for fund managers, says U.N.-backed study

LONDON (Reuters) - Fund managers that do not incorporate sustainability criteria into their investment decisions are failing in their fiduciary duty, a United Nations-backed report said on Monday.

U.S. managers were particular laggards in making sure environmental, social and governance (ESG) views were used alongside other financial measures when discussing a company’s investability, in part because of an outdated view of fiduciary duty, or acting in the best interests of customers, it said.

A lack of consistency when incorporating ESG information into investment decisions, and poor communication with clients such as pension funds also hampered its take-up, it said.

“Failing to consider long-term investment value drivers, which include environmental, social and governance issues, in investment practice is a failure of fiduciary duty,” the authors of the study, backed by U.N. partner organisations including the Principles for Responsible Investment, said.

Outdated perceptions about fiduciary duty and responsible investment were particularly prevalent in the United States, the report said, “where lawyers and consultants too often characterise ESG issues as non-financial factors”, they added.

While many managers look broadly at factors influencing the performance of the companies they invest in, others take a much narrower view, focusing instead on pure financial performance such as that seen in an earnings statement.

ESG factors could include failures in governance, such as those that contributed to a 2010 oil spill resulting in BP BP.L paying out $18.7 billion in damages.

European managers have led the way in incorporating ESG factors into their investment process, driven by asset owners such as pension funds, but some managers are still concerned they could be liable to a claim by investors if they use ESG factors to pick an investment and it then falls in value.

The report therefore called on regulators and policymakers to clarify that fiduciary duty includes taking ESG factors into account when investing, and also ensure companies and fund managers were more transparent when reporting about ESG issues.

Asset owners also need to be better at overseeing their investments, to ensure fund managers adhere to the sustainability element of mandates, once won; while legislation and policy instruments need to be harmonised globally, the report said.

Reporting by Simon Jessop; Editing by Mark Potter