UK focus on ESG disclosure lags pursuit of impact goals

PRI says sustainability impact of portfolios must be tackled

The fact that UK investors are required to disclose how they manage ESG risks to investments, rather than how they are tackling the sustainability impact of their portfolios is holding them back, according to the UN Principles for Responsible Investment (PRI).

Building on its report from last year, A Legal Framework for Impact, the PRI last week published an update examining the UK’s legal and regulatory guidance in this area and suggesting where policy updates could be made to bring UK investors up to speed.

It found although the UK has been “proactive in introducing policies to tackle climate change and encourage responsible investment”, such as publishing its Green Finance Strategy, requiring pension schemes to disclose in line with Task Force on Climate-related Financial Disclosures and establishing the voluntary UK Stewardship Code, these are too focused on disclosure and must develop to also focus on impact.

For example, investment managers are not under an explicit general duty to invest or engage for positive sustainability impact, although they can do if that is their clients’ goal, meaning the legal position is not applied in a general way across all clients.

“Policymakers also need to address the extent to which investors are contributing to the achievement of those goals in practice,” the report said.

Margarita Pirovska, director of policy at the PRI, added: “In the absence of more explicit guidance and direction, asset owners and asset managers may remain hesitant to use investment decisions, stewardship and policy engagement to pursue positive sustainability impacts.”

Recommendations

The PRI therefore makes three policy recommendations. The first is to clarify when sustainability impact goals must or can be considered as part of the duties of loyalty, care and prudence.

The second is to clarify that purpose-related requirements entail consideration of sustainability impact goals.

And the third is to ensure stewardship powers are used to achieve sustainability impact goals.

It also recommends sustainability-related disclosures and labelling/classification for sustainable investment products undergo further policy consideration, as does competition law, options to enable consideration of certain sustainability impact goals and of individual investors’ views on sustainability, and guidance for pension schemes on assessing the relevance of social and environmental goals.

Pirovska said: “We included recommendations that will empower investors to consider sustainability factors and to pursue sustainability impact goals, in particular where these are relevant to financial returns.”

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Natasha Turner

Natasha is global deputy editor at ESG Clarity, part of the Bonhill Group, and has been a financial journalist for six years. She has been shortlisted for Story of the Year and Investment Journalist of...