Are Financial Goals The Only Ones To Be Pursued By Institutional Investors?

Freshfields – Institutional investors such as pension funds and insurance companies – and the managers who invest on their behalf – control trillions of dollars of assets. Using that money to generate financial returns is critical to support people in their retirement, cover the cost of policy payouts and drive growth for shareholders.

In the past it was accepted that investors had no wider responsibility than this. But can delivering financial returns be their sole objective now the world has broader environmental and societal goals, many of which (such as tackling climate change) have an impact on asset values? If it should be, does that exclude the pursuit of environmental and social goals? To what extent can – and should – institutional investors use their power and influence to generate a positive sustainability impact? And what role does the law play in supporting this process?

These are the questions we were commissioned to answer by The Generation Foundation, the UN-supported Principles for Responsible Investment (PRI) and the UN Environment Programme Finance Initiative (UNEP FI). Our response – A legal framework for impact – was published on 21 July 2021.

Analysis of the law in 11 global investment hubs

The report analyses the law in 11 global investment hubs (Australia, Brazil, Canada, China, the EU, France, Japan, the Netherlands, South Africa, the United Kingdom and the United States) and reveals whether it permits – or even requires – investors to seek to influence the activities of investee companies and third parties in ways that have a positive sustainability impact, either to achieve their financial goals or as a standalone objective. Where ‘investing for sustainability impact’ is not enabled by the law, we have suggested how policymakers might look to address the gap.

Our research found that, while there are differences across the jurisdictions and investor groups we analysed, where 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. Cases where investors can pursue sustainability goals for their own sake in parallel with financial goals are more limited, but there are instances in most jurisdictions, usually subject to prioritising financial goals.

A key resource for institutional investors

A legal framework for impact is of key importance to institutional investors as they increasingly consider the question of their impact, clarifying as it does the legal position on this pressing issue. PRI, UNEP FI and The Generation Foundation are now using the report as the catalyst for a three-year work programme designed to reshape legal and regulatory systems so they are equipped to meet the most important sustainability challenges we face.

The report is the product not only of our lawyers around the world but also those of our StrongerTogether network, who have provided insights on those jurisdictions where we do not have a presence on the ground. We would like to thank them all for their vital contributions.