Fiduciary II - a follow up to Freshfields

...or 'I read 60+ pages so you don't have to'

“The single most effective document for promoting the integration of environmental, social and governance (ESG) issues into institutional investment has arguably been the ‘Freshfields Report’ published in 2005, which the UNEP FI Asset Management Working Group (AMWG) commissioned to Freshfields Bruckhaus Deringer, a leading international law firm….In the four years since the launch of the original Freshfields report, we have seen more innovation and evolution in the field of ESG integration than in any other similar time span in history.”

The follow up report, released earlier this month and referred to as Fiduciary II, makes a series of recommendations intended to help institutional investors move more quickly along the path of ESG integration. Fiduciary II is divided into three parts. Part I provides legal commentary on fiduciary duty and the implementation of ESG in investment mandates, see ‘Institutional Advisors at Risk, UN report warns’ July 15. Legal opinions are provided by Paul Watchman of Quayle Watchman Consulting, who was the principal author of the Freshfields report, and Michael Gerrard, Robert Holten and Aron Estaver of Arnold & Porter LLP in the United States.

Part II provides an analysis of investment management consultants responses to a survey on how they are working with ESG. Some interesting points are made around how investment timeframes and the practice of evaluating short term performance against a benchmark may work against inclusion of ESG factors which typically occur over the medium to long term. “They felt that placing too much emphasis on short-term investment performance was detrimental to the pursuit of long term performance goals. It was in the domain of long-term performance that ESG factors were believed to have the biggest impact on investment returns.” The questionnaire itself is reproduced in Appendix C of the Report.

Part III brings us up to date on practical developments on the integration of ESG into the investment process. Here we get information on entities such as the Norwegian Pension Fund and the Marathon Club, as well as overviews of studies such as the FairPensions survey of 30 asset managers in the UK.

The introductions to the report refer to the historic moment at which we find ourselves, with the global financial markets found wanting and at a crossroads. “Many of us in the field of responsible investment believe that the financial meltdown actually represents a unique opportunity to ‘recast’ some of the most basic tenets of fiduciary investment. After the fallout of the crisis, many fiduciaries will wisely look at the impact of the crisis on their investments, and look for new approaches to steward and allocate their assets.”