Fiduciaries Need to Proactively Raise Corporate Responsibility Matters

As the global financial crisis moves into maturity, it is clear that novel solutions must be found to a novel set of problems. The United Nations Environment Programme Finance Initiative(UNEP) proffers such a new approach.

According to its most recent report, investment advisors have a fiduciary responsibility to proactively raise environmental, social and governance (ESG) issues, in addition to other financial matters.

KEY HIGHTLIGHTS OF THE REPORT:

* The global economy has now reached the point where ESG issues are a critical consideration for all institutional investors and their agents.

* Investment consultants and asset managers have a duty to proactively raise ESG issues within their advice and services to institutional investors.

* ESG issues must be embedded in the legal contracts between institutional investors and their asset managers to hold asset managers to account, and that ESG issues should be included in periodic reporting by asset managers. Equally, the performance of asset managers should be assessed on a longer-term basis and linked to long-term incentives.

* Institutional investors will increasingly come to understand the financial materiality of ESG issues and the systemic risk they pose, and the profound long-term costs of unsustainable development and the consequent impacts on the long-term value of their investment portfolios.

* Institutional investors will increasingly apply pressure to their asset managers to develop robust investment strategies that integrate ESG issues into financial analysis, and to engage with companies in order to encourage more responsible and sustainable business practices.

* Policymakers should ensure prudential regulatory frameworks that enable greater transparency and disclosure from institutional investors and their agents on the integration of ESG issues into their investment process--as well as from companies on their performance on ESG issues.

* Civil society institutions should collectively bolster their understanding of capital markets such that they can play a full role in ensuring that capital markets are sustainable and delivering responsible ownership practices.

* Market incentives that reward long-term investment must be made to help create responsible and sustainable capital markets that would help identify future challenges in the financial system, reduce the chances of further crises and help avert a "Natural Resources Crisis"--and accelerate the transformational process to a green, inclusive and sustainable global economy.

It will not be long before corporate directors, as fiduciaries, should have to play by the same rules. Stay tuned. . . .

(c) 2009 Adonis E. Hoffman