Fiduciary Duty 21st Century

FIDUCIARY DUTY

21
IN THE ST

CENTURY
FIDUCIARY DUTY IN THE 21ST CENTURY 2

ACKNOWLEDGEMENTS
This report has been prepared by: Rory Sullivan, Will Martindale, Elodie Feller and Anna Bordon.
Design by: Alessandro Boaretto, PRI
CORE PROJECT TEAM PROJECT STEERING COMMITTEE

• Rory Sullivan, Senior Advisor • Fiona Reynolds, Managing Director, PRI
• Will Martindale, Head of Policy, PRI • Nick Robins, Co-Director, UNEP Inquiry
• Elodie Feller, Investment Commission Coordinator, UNEP FI • David Pitt-Watson, Co-Chair, UNEP FI
• Anna Bordon, Policy and Research Officer, PRI • Gavin Power, Deputy Director, UN Global Compact
• Jaime Garcia-Alba, Head, Private Sustainability Finance and
Reporting, UN Global Compact
ACKNOWLEDGEMENTS TO CONTRIBUTORS
The project team and the project steering committee would like to thank all of the interviewees, and reviewers for their time and immense valuable contribution to
this project, in particular: Aditi Maheshwari, Alan Nii, Alex Cosgrove, Alison Schneider, Alison Harwood, Amane Fujimoto, Andreas Hallermeier, Anne Wittman, Anne-
Maree O’ Connor, Anton Pillay, Axel Hesse, Bernadette Dietrich, Bethan Livesey, Bettina Kretschmer, Bozena Jankowska, Brian Golob, Bruce Duguid, Bruno Couri,
Carlos Joly, Carolyn Morris, Catarina Dacosta Freitas, Charles Anderson, Chris Hodge, Chris Davies, Christopher Langdon, Claire Gowdy, Claudia Kruse, Craig Roodt,
Dan Chornous, Daniel Benay, Daniel Ingram, Daniel Simard, Daniela Saltzman, Danielle Press, David Styles, David Geral, Ed Waitzer, Erik Breen, Faith Ward, Fernando
Duarte Folle, Fiona Elisabeth Stewart, Fumito Kawanishi, George Dallas, George Iguchi, Greg Winfield, Hannine Drake, Hiroichi Yagi, James Andrus, Joakim Sandberg,
Jonathan Grabel, José Carlos H. Doherty, Judith Mares, Judy Cotte, Juliane Hilf, Julio Dubeux, Justin Atkinson, Karen Lockridge, Katharine Preston, Kazuhiro Okuma,
Kensuke Suzuki, Kirshni Totaram, Krupa Kotecha, Larry Beeferman, Lorraine Allard, Louise Crawford, Luciana Burr, Lucy Tusa, Marcel Barros, Marcel Theroux,
Marcelo Seraphim, Marguerite Mills, Màrio Fleck, Mark Chaloner, Mark Firman, Meg Voorhes, Mervyn E. King, Michael C. Nicholas, Michael McCauley, Murray Gold,
Nancy J. Carroll, Natalie Smith, Normand Brouillet, Paul Clements-Hunt, Paul Watchman, Pedro A. Garcia, Peet Maritz, Pierre Habbard, Rebecca O’Brien Radford,
Rob Lake, Robert G. Eccles, Rosalie Vendette, Rosemary Hunter, Ryuji Sakai, Sarah Barker, Sean D. Sadler, Shalini Rao, Simon Taylor, Sonia Inkpin, Sonia Struthers,
Stephen Jaggers, Stephen Masterman, Steve Berexa, Steve Waygood, Takejiro Sueyoshi, Tashia Jithoo, Tatiana Bosteels, Randy Bauslaugh, Tetsuo Kitagawa, Thomas
Neumann, Tom Powdrill.
The following law firms provided legal research assistance in the production of this report. However, all opinions expressed in this report are those of the UNEP
Finance Initiative, the PRI, the UN Global Compact and the UNEP Inquiry and do not necessarily reflect the views of these firms: Bowman Gilfillan, King & Wood
Mallesons, McCarthy Tétrault LLP, NagashimaOhno&Tsunematsu, Veirano Advogados.
We would like to thank the PRI, UNEP FI and UN Global Compact teams for their support in coordinating the interviews and for reviewing earlier drafts of this report,
in particular: Adrian Betrand, Alyssa Heath, Caitlin Casey, Danielle Chesebrough, Dustin Neuneyer, Eric Usher, Fiona Reynolds, Geeda Haddad, Ingvild Soerensen,
Jaime Garcia Alba, Joy Frascinella, Kaori Nomura, Maria Lettini, Melanie Klebeck, Mengqi Cai, Michiyo Morisawa, Nathan Fabian, Robert Bartram, Rubi Hernandez,
Ryan Cunningham, Sabina Timco, Shalini Samuel, Sonal Mahida, Tatiana Assali, Yuki Yasui, Yulia Sofronova.
For any further questions email: [email protected] or [email protected].

CANADA
UNITED KINGDOM
UNITED STATES
GERMANY
BRAZIL
SOUTH AFRICA JAPAN
AUSTRALIA
RESEARCH APPROACH DEFINITIONS

This report is based on an analysis of investment practice and ESG integration refers to the process of taking account of ESG
fiduciary duty in eight countries: Australia, Brazil, Canada, Germany, data and information in investment research and decision-making
Japan, South Africa, the UK and the US. The findings presented here processes. The definition is broad to take account of the different
are based on: ways in which investment organisations consider ESG issues (such
• structured interviews with over 50 asset owners, investment as screening, fundamental analysis, thematic analysis).The key
managers, lawyers and regulators across the eight countries; point is that decisions are driven by the financial rather than ethical
implications of the issue in question.
• a comprehensive review of law and policy on fiduciary duty in
each of these eight countries, focusing in particular on how
Active ownership refers to the manner in which investors use their
these have changed since 2005;
formal rights (proxy voting and filing shareholder resolutions) and
• convening and participating in roundtables and conferences in their position as an investor to influence the activity or behaviour of
Australia, Japan, Canada, the UK and the US; companies or other entities.
• a series of global webinars in July 2015 where the initial
findings were discussed with institutional investors and with Responsible investment is an approach to investment that
global experts on fiduciary duty and responsible investment; explicitly acknowledges the relevance to the investor of ESG
• a global peer review process in July 2015 where the draft factors, and of the long-term health and stability of the market
report was reviewed by global experts on fiduciary duty and as a whole. It recognises that the generation of long-term
responsible investment. sustainable returns is dependent on stable, well-functioning and
well governed social, environmental and economic systems.
Responsible investment can be differentiated from conventional
approaches to investment in two ways. The first is that timeframes
are important; the goal is the creation of sustainable, long-term
investment returns not just short-term returns. The second is that
responsible investment requires that investors pay attention to
the wider contextual factors, including the stability and health of
economic and environmental systems and the evolving values and
expectations of the societies of which they are part.
CONTENTS
Forewords 05
Executive summary 09
Introduction: what is fiduciary duty and why is it important? 11
The changing landscape of fiduciary duty 14
A global roadmap for sustainable value creation 20
Country-specific recommendations 22
Country analysis
24
• Australia 25
• Brazil 31
• Canada 37
• European Union 43
• Germany 45
• United Kingdom 51
• Japan 59
• South Africa 65
• United States 72
Appendices 81
• Interviewees 81
• Global peer reviewers 84
• Further reading 85
FOREWORDS
AL GORE AND DAVID BLOOD

Fiduciaries are tasked with the decision to buy, sell, or hold
assets. There is no passive behaviour as a fiduciary; there is no
“do nothing” task. Those who defend an obsolete interpretation of
fiduciary duty sometimes justify the active omission of sustainability
considerations by asserting that sustainability dynamics somehow
have no impact on financial assets. Overwhelming evidence now
shows, however, that they are simply mistaken. Sustainability is an
important factor in the long-term success of a business. Therefore
as with any other issue related to the prudent management of
capital, considering sustainability is not only important to upholding
fiduciary duty, it is obligatory.
This report is a landmark piece in the global dialogue on the

relevance of sustainability to fiduciary duty. By clearly defining the
full remit of fiduciary duty and providing recommendations for how
Mr. Gore, chairman of Generation Investment Management, is a former vice
president of the United States. Mr. Blood is senior partner of Generation Investment it should be implemented, this work serves as a definitive guide for
Management. any fiduciary unsure of the role that sustainability should play in
their decision-making process.
In particular, the Global roadmap for ESG integration in this report

provides key insights for various stakeholders, outlining the need
to recalibrate the scope of fiduciary duty at an industry-wide level.
Generation Investment Management is deeply committed to this
viewpoint and we look forward to working with the authors of this
report to advance the recommendations they have put forth.
The importance of sustainability to business and investing is

intensifying as financial markets are increasingly forced to address
challenges posed by the scarcity of natural resources, the effects
of unabated carbon emissions, rapid urbanisation and the widening
inequality of wealth and incomes, to name just a few. As the
context of business and investing continues to shift, implementing
a framework for allocating capital that embeds sustainability into
it will be critical to successfully navigate the transition. Prudent
fiduciaries of capital should use this report to adjust their actions
accordingly.
MARCEL BARROS
Fiduciary duty is central to the functioning and credibility of the
Brazilian investment market. As an asset owner, we are required
by law to disclose potential conflicts of interest and to perform our
activities using all the care and diligence that an active and honest
person would use when managing his or her own business. These
requirements are reinforced by strong self-regulatory requirements
that are enforced by key market actors.
Brazilian investors are increasingly focusing the fiduciary duty

debate on the convergence between responsible investment and
financial aspects. Of particular importance has been Resolution
3.792, issued in 2009 by the Brazilian Monetary Council (Conselho
Monetario Nacional (CMN)), which requires closed pension funds
to state whether they take account of environmental and social
issues in their investment practices. This change is being reinforced
Mr. Barros is the executive director for PREVI
by the growing awareness of the investment implications of social
and environmental issues such as access to water, child labour and
workers’ rights.
As asset owners, we recognise that we have responsibilities

to deliver pension benefits to our beneficiaries and we believe
responsible investment is a keystone to continue reaching this
objective, now and in the future. This important report reinforces the
integration of environmental, social and governance issues in our
investment practices and in our dialogue with companies. This can
only be positive for investors and for wider society over the long-
term.
CORIEN WORTMANN-KOOL
ABP is one of the world’s largest pension funds, managing over
EUR 350bn on behalf of Dutch pensioners. With this scale comes
the obligation to optimize risk-adjusted returns and invest in a
responsible manner. This is driven by a variety of factors: by our
own beliefs about our responsibilities to our beneficiaries, by the
consensus in the Netherlands that pension funds have broader
societal responsibilities, by Dutch pension law, by the emerging
body of European law, and by our beneficiaries themselves.
We recognize that our fiduciary obligations are not confined to the

manner in which we carry out our own investment activities. Our
ability to deliver on our long-term responsibilities to our beneficiaries
is dependent on stable and resilient capital markets and economies,
and on healthy and sustainable social and environmental systems.
Ms. Corien Wortmann-Kool is the
chairwoman for ABP This report provides a compelling roadmap to help advance more
long term thinking in financial markets. It is clear that progress will
depend on effective collaboration between investors, policymakers
and other stakeholders. We are looking forward to being part of this
process.
RICHARD F. LACAILLE
Sound logic informs the ESG investment thesis, grounded in the
belief that value creation is influenced by more than financial capital
alone, especially longer term. There is mounting evidence that ESG
issues can affect the performance of investment portfolios and have
implications for a company’s earnings and prospects as well as
broader economic functioning.
This view is informed both by our own research as well as a body

of academic and industry study. In parallel, active ownership
plays a prominent role in our duty to act as stewards of our clients’
assets. We expect strong governance standards from our investee
companies and our direct engagement with them focuses on
advocating change where poor ESG practices place shareholder
value at risk.
Mr. Richard Lacaille is the Global Chief
Investment Officer for State Street Global ‘Fiduciary Duty in the 21st Century’ offers a compelling argument
Advisors for investors which may be circumspect of the compatibility of
ESG with their duties as a fiduciary. For those already cognizant
of the relevance of sustainability issues to investment and active
ownership practices it stands as a stout affirmation. Regardless of
the readers position it’s a pivotal contribution to the literature on a
critical aspect of the bedrock of investment.
EXECUTIVE
SUMMARY
The purpose of this report is to end the debate Despite significant progress, many investors
about whether fiduciary duty is a legitimate have yet to fully integrate environmental, social
barrier to investors integrating environmental, and governance issues into their investment
social and governance (ESG) issues into their decision-making processes.
investment processes.
This report identifies a series of challenges:
Its precursor, a 2005 report commissioned by UNEP FI from law • Outdated perceptions about fiduciary duty and responsible
firm Freshfields Bruckhaus Deringer concluded that integrating ESG investment. This is particularly the case in the United States
considerations into investment analysis is “clearly permissible and where lawyers and consultants too often characterise ESG
is arguably required.” issues as non-financial factors.
• A lack of clarity within prevailing definitions of fiduciary duty
In the decade that followed, many asset owners have made about what ESG integration means in practice and, in particular,
commitments to responsible investment. Many countries have whether active ownership and public policy engagement form
introduced regulations and codes requiring institutional investors part of investors’ fiduciary duties.
to take account of ESG issues in their investment decision-making. • Limited knowledge of the evidence base for responsible
These changes - in investment practice and in public policy - investment, including the strength of the relationship between
demonstrate that, far from being a barrier, there are positive duties ESG issues and investment performance.
on investors to integrate ESG issues.
• Lack of transparency on responsible investment practices,
processes, performance and outcomes, limiting investors’
Failing to consider long-term investment value accountability to their beneficiaries, their clients and wider
drivers, which include environmental, social and society.
governance issues, in investment practice is a • Inconsistency in corporate reporting, including inadequate
failure of fiduciary duty. analysis of the financial materiality of ESG issues, making it
hard to assess investment implications.
When evaluating whether or not an institutional investor has • Weaknesses in the implementation, oversight and enforcement
delivered on its fiduciary duties, both the outcomes achieved and of legislation and industry codes on responsible investment.
the process followed are of critical importance. For example, a
decision not to invest in a high-carbon asset because of financial Our research finds that fiduciary duties have played, and continue
concerns about stranded assets is likely to be seen as consistent to play, a critical role in ensuring that fiduciaries are loyal to their
with fiduciary duties, providing that the decision is based on beneficiaries and carry out their duties in a prudent manner.
credible assumptions and robust processes. However, we conclude that action is needed to modernise
definitions and interpretations of fiduciary duty in a way that
ensures these duties are relevant to 21st century investors.
To overcome these challenges, this report

proposes a series of recommendations for
institutional investors, financial intermediaries
and policymakers.
In particular, policymakers and regulators should:
• Clarify that fiduciary duty requires investors to take account
of ESG issues in their investment processes, in their active
ownership activities, and in their public policy engagement.
• Strengthen implementation of legislation and codes,
clarifying that these refer to ESG issues, and require investor
transparency on all aspects of ESG integration, supported by
enhanced corporate reporting on ESG issues.
• Clarify the expectations of trustees’ competence and skill
and support the development of guidance on investor
implementation processes, including investment beliefs, long-
term mandates, integrated reporting and performance.
• Support efforts to harmonise legislation and policy instruments
on responsible investment globally, with an international
statement or agreement on the duties that fiduciaries owe
to their beneficiaries. This statement should reinforce the
core duties of loyalty and prudence, and should stress that
investors must pay attention to long-term investment value
drivers, including ESG issues, in their investment processes,
in their active ownership activities, and in their public policy
engagement.
Integrating ESG issues into investment research

and processes will enable investors to make
better investment decisions and improve
investment performance consistent with their
fiduciary duties. This will result in capital being
allocated towards well-governed companies,
putting investors in a better position to
contribute to the goals of a greener economy
and a more sustainable society.

INTRODUCTION:
WHAT IS FIDUCIARY DUTY
AND WHY IS IT IMPORTANT?
Fiduciary duties are imposed upon a person or an organisation What is Fiduciary Duty?
who exercises some discretionary power in the interests of another Fiduciary duties (or equivalent obligations) exist to ensure that
person in circumstances that give rise to a relationship of trust those who manage other people’s money act in the interests of
and confidence. They are of particular importance in asymmetrical beneficiaries, rather than serving their own interests. The most
relationships; these are situations where there are imbalances in important of these duties are:
expertise and where the beneficiary has limited ability to monitor or
oversee the actions of the entity acting in their • Loyalty: Fiduciaries should act in good faith in the interests of
interests. their beneficiaries, should impartially balance the conflicting
interests of different beneficiaries, should avoid conflicts of
While the core concepts of fiduciary duty remain as relevant to interest and should not act for the benefit of themselves or a
today’s investment markets as they have ever been, investors with third party.
fiduciary duties need to address fundamental questions such as: • Prudence: Fiduciaries should act with due care, skill and
• Should investors take account of environmental, social and diligence, investing as an ‘ordinary prudent person’ would do.
governance (ESG) issues in their investment processes and
decision-making?
• Should investors encourage higher standards of ESG Despite the conclusions of the Freshfields report, many investors
performance in the companies in which they are invested? continue to point to their fiduciary duties and to the need to deliver
• Do investors have a responsibility to support the integrity and financial returns to their beneficiaries as reasons why they cannot
stability of the financial system? do more on responsible investment.
• How should investors respond to wider systemic risks – and
opportunities – such as those presented by climate change?
OUR OBJECTIVES
The starting point for our research was the question of whether
BACKGROUND there is a need to reframe or redefine fiduciary duty in a way that is
In 2005, a group of investment managers organised under the relevant for 21st century investors. We wanted to explore whether
United Nations Environment Programme Finance Initiative (UNEP fiduciary duty is a legitimate obstacle to investors taking account
FI) commissioned the law firm Freshfields Bruckhaus Deringer to of ESG issues in their investment processes. We also wanted to
publish the ground-breaking report titled A Legal Framework for explore the question of whether investors’ fiduciary duties require
the Integration of Environmental, Social and Governance Issues into them to consider the impacts of their investment activities on wider
Institutional Investment (commonly referred to as the Freshfields society and on the environment and, if so, what the implications for
report). The report, in what was seen as a radical conclusion investment practice might be.
at the time, argued that “integrating ESG considerations into
an investment analysis so as to more reliably predict financial
performance is clearly permissible and is arguably required in all
jurisdictions.”
LEGAL CONTEXT • Duty to act conscientiously in the interests of beneficiaries –

In each of the eight jurisdictions examined in this report, investors this duty is expressed in different terms, with jurisdictions using
have varying degrees of discretion as to how they invest the terms such as “good and conscientious manager” (Japan) or
funds they control; it may be narrow, such as for tailored mutual “professionally” (Germany).
funds where the beneficiary specifies the asset profile and only • Duty to seek profitability.
the day-to-day stock selection and other management tasks are • Recognition of the portfolio approach to modern investment,
left to the investor, or it may be wide, as with many occupational either in express terms or implicitly in the form of requirements
pension funds, where very few limits are typically placed on the to ensure adequate diversification.
way the fund may be managed. Some public funds are subject • Other duties relating to liquidity and limits on the types of
to considerable state control and the discretion afforded to assets that may be selected for certain types of funds.
these investors may be further narrowed by parameters set by
government. In all jurisdictions, the rules that affect investment decision-
making take the form both of specific laws (about the types of
Within the discretion left to the investors, certain legal rules assets that are permitted for certain types of investment, and the
define their ability to integrate ESG considerations into their extent to which the assets of a fund may be invested in specific
decision-making. It is these rules that are the subject of this asset classes or be exposed to specific issuers or categories of
report. issuers, for example) and general duties that must be fulfilled (such
as duties to ensure investments are adequately diversified).
COMMON LAW VS CIVIL LAW JURISDICTIONS

In the common law jurisdictions covered by this report – TREATMENT OF ESG ISSUES
Australia, Canada, South Africa, the UK, the US – fiduciary duties In none of the jurisdictions do the rules exhaustively prescribe how
are the key source limits of the discretion of investment decision- investors should go about integrating ESG opportunities and risks
makers, aside from any specific constraints imposed contractually in their investment practices and processes, and on the timeframes
or by regulation. These duties are articulated in statute and decided over which they define their investment goals. In most cases, it is
in the courts: some rules are open to re-interpretation over time or left to investors to determine the approach that will enable them to
when applied to new facts. In the US, for example, the decision- meet their legal obligations in the particular circumstances.
maker’s duty is to exercise reasonable care, skill, and caution in
pursuing an overall investment strategy that incorporates risk and When evaluating whether or not an institutional investor has
return objectives reasonably suitable to the trust. delivered on its fiduciary duties, courts will look at the evaluation
and integration process of ESG issues into the investment decision-
In countries where civil law applies – Brazil, Germany, Japan making.
– any obligations equivalent to ‘fiduciary duties’ will be set-out in
statutory provisions regulating the conduct of investment decision-
makers and in the governmental and other guidelines that assist EVOLUTION OF FIDUCIARY DUTY
in the interpretation of these provisions. The content of each of
these statutory provisions differs slightly between jurisdictions and Over the past decade, there has been relatively little change in the
depending on the type of institutional investor, but common themes law relating to fiduciary duty.
include:
However, there has been a significant increase in ESG disclosure

requirements for asset owners and investment managers and in
the use of soft law instruments such as stewardship codes that
encourage investors to engage with the companies in which they
are invested. Many of the interviewees for this project commented
that while the law may not change quickly, there is likely to be
increased use of disclosure requirements and soft law measures to
encourage investors to pay greater attention to ESG issues in their
investment practices and processes.
In addition, the economic and market environment in which the law

is applied has changed dramatically. Factors such as globalisation,
population growth and natural resource scarcity, the internet and
social media, and changing community and stakeholder norms
all contribute to the evolution in the relevance of ESG factors to
investment risk and return. This necessarily changes the standards
of conduct required of fiduciaries to satisfy their duties under the
law.
“The concept of fiduciary duty is organic,

not static. It will continue to evolve as
society changes, not least in response to
the urgent need for us to move towards
an environmentally, economically and
socially sustainable financial system.”
Paul Watchman (Honorary Professor, School of Law, University of Glasgow)

THE CHANGING
LANDSCAPE OF
FIDUCIARY DUTY
INVESTMENT PRACTICE Why are Investors Interested in ESG Issues?
More investors take account of ESG issues in their investment The analysis of ESG issues as an integral part of the investment
processes … process enables investors to make a full assessment of the risks
and opportunities associated with particular investments. This
Many of the interviewees for this research commented that, far allows them to make better investment decisions and facilitate
from the radical statement it appeared at the time of the 2005 more accurate valuations of businesses by the investment markets.
Freshfields report, the argument that ESG issues can be material It also contributes to a higher quality dialogue between companies
and that investors should, therefore, take account of these issues is and their investors on drivers of long-term value creation,
no longer controversial. provides incentives to companies to improve their governance
and management of ESG issues, and encourages investors to
Interviewees pointed to issues as diverse as climate change proactively seek out opportunities presented by these issues.
regulation, labour rights, tax, bribery and corruption, changing
demographics and consumer expectation as illustrations of This analysis and dialogue will result in capital being allocated
how ESG issues can affect investment value and investment towards well-governed companies, putting it in a better position
performance. They pointed to the growth in the quality and quantity to contribute to the goals of a greener economy and a more
of sell-side research on the investment implications of ESG issues sustainable society.
as tangible evidence that the investment relevance of these issues
is starting to be accepted within the investment industry.
The fact that an increasing number of institutional investors elucidation of governance issues (e.g. the Enron case or the SEC
have high level commitments to integrate ESG issues into their decisions on credit rating agencies), to broadly accepted principles
investment processes and to engage with companies on ESG issues on the characteristics of good governance, to the quality of
was also highlighted as tangible evidence of change within the corporate reporting and to the robust academic evidence.
investment industry.
In contrast, many interviewees said that the relationships
…although perceptions of materiality differ… between specific social and environmental issues and investment
performance are often not clear, that the investment tools for
On performance, the evidence from the academic and practitioner analysing these issues remain relatively underdeveloped (although
literature is seen by most interviewees as being robust enough to a number pointed to the work that has been done on climate
argue that, at a minimum, fiduciaries should consider these issues change scenarios as a notable exception) and that a lack of
as part of their investment process. There is, however, an important standardised reporting on these issues makes it difficult to draw
difference in practitioners’ perceptions of corporate governance conclusions on their financial implications.
issues and social and environmental issues.
While many countries now have policies that encourage long-
Interviewees consistently stated that corporate governance issues term responsible investment…
are the most robustly tested and understood in terms of their
impacts on investment performance. They pointed to the legal
In what looks like the start of a wider global trend, voluntary uptake. It also reflects limited assessment: though most of these
stewardship codes (where signatories to these codes commit to codes and disclosure requirements require some sort of public
engage with the companies in which they are invested) have been reporting on the number of signatories to a code or the number that
developed by or in conjunction with the investment industry in the have complied with the code or the disclosure requirements, there
UK, Japan and South Africa. A number of interviewees, however, has been limited analysis of the actions that have been taken or of
cautioned that these codes tend to be disproportionately focused on how the actions taken have affected investor or corporate practice.
governance issues.
Interviewees identified other shifts in investment markets, globally
Interviewees commented that disclosure requirements such as and within countries, that may affect how investors think about
Ontario’s pension standards legislation (PBA909), which will require these issues. It is not clear how, if at all, they will affect investors’
pension funds to disclose information about whether ESG factors approach to responsible investment or ESG integration. Particularly
are incorporated into their investment policies and procedures, important changes include:
have been particularly important in stimulating boards of trustees • The shift from defined benefit to defined contribution pension
to explicitly discuss ESG issues and to seek advice on how regimes in most markets, as a result of increases in lifespan,
responsible investment is consistent with their fiduciary duties. falling returns and increasing costs.
• The drive for pension fund consolidation to improve governance
...many investors have yet to integrate ESG issues consistently
and cost efficiency, in particular for smaller funds.
and systematically into their investment processes…
• The need to reduce costs, with pension funds allocating large
Despite the progress that has been made in recognising the proportions of their assets to passive investments and pushing
materiality of ESG factors, many investors have yet to integrate down fees.
them into their investment processes or engage with the companies
in which they are invested. In some cases, this is an issue of
capacity, with smaller funds often lacking the resources, expertise FIDUCIARY DUTY
or awareness, but interviewees said that even large asset owners Fiduciary duty is not the obstacle it is commonly assumed to
that have made commitments are often weak in implementing be…
them.
Many of the asset owners interviewed for this research have taken
For example, the 2014 PRI Report on Progress found that just 49% a proactive approach to responsible investment or ESG integration.
of asset owners include requirements in their external manager The consistent message, across all eight of the countries, was that
agreements for reporting on ESG issues, while just 24% include fiduciary duty is not an obstacle to action. Most described fiduciary
voting requirements, and just 12% require engagement. duty as a requirement that informs investment and management
practice in a similar manner to aspects such as costs and
…as a consequence of weaknesses in policy implementation investment returns. Some went further arguing that fiduciary duty
and of other changes in investment markets. creates a positive duty on them to take ESG issues into account in
their investment practices, suggesting that a failure to take account
Interviewees commented that one of the reasons for this lack of of ESG issues could be seen as a breach of their fiduciary duties.
progress is the weakness in the implementation of many of the
stewardship codes and asset owner disclosure requirements. This …although fiduciary duty is often presented as an excuse for
is partly because many of these are relatively new and the relevant not taking action.
policymakers have concentrated on encouraging their adoption and
However, the interviewees commented that asset owners and wisdom of hindsight, or second-guess judgments that inherently
advisers often point to fiduciary duty as the reason why they involve a balance of commercial risks, providing that the fiduciaries
cannot integrate ESG issues into their investment processes or can demonstrate that they applied an appropriate degree of
engage with companies on these issues. This argument is often diligence in their good-faith pursuit of beneficiaries’ interests.
underpinned by the assumption that a focus on ESG issues requires
a trade-off in investment performance. This is particularly important …which means that investors are encouraged to take a
in the US, where interviewees pointed to the common belief that proactive, long-term approach on ESG issues.
investors can only pursue corporate governance or non-financial
issues if it can be clearly demonstrated that these activities do not Though regulatory authorities generally do not take a view on
harm the value of investment assets. whether or not asset owners should invest in particular sectors
or activities, they do expect asset owners to be aware of and to
Fiduciary duty is just one reason why asset owners are not manage ESG risks, and to pay close attention to decisions that
embracing responsible investment; it may not even be the most lead to skews in portfolios. Regulatory authorities will tend to look
important barrier. Interviewees noted that other areas to consider closely at investment decisions that expose funds to particular
include: risks (e.g. a high-carbon portfolio or a portfolio with a weighting
• Resource constraints – not least because of the growing to renewable energy) and will expect them to explicitly assess the
complexity of the regulatory and other requirements faced by implications for the overall risk profile of the fund.
pension funds.
This suggests that asset owners may take account of wider ESG
• Knowledge and understanding of ESG issues – both in terms
issues, so long as there is a clear focus on beneficiaries’ interests.
of how ESG issues might affect investment performance and
In that context, for example, a decision not to invest in coal mines
of how ESG integration and responsible investment might be
(e.g. because of concerns about these assets being stranded as a
implemented within the organisation.
result of climate change policy) is likely to be seen as consistent
• Personal values and perceptions – notably, the common with fiduciary duties so long as this decision is based on credible
misperceptions that ESG issues are purely ethical issues, that assumptions and a robust decision-making process. This requires
a focus on ESG issues involves compromising investment trustees to have the discipline to set out their investment beliefs,
performance and that it is difficult to add investment value to be prepared to review the investment outcomes achieved and to
through a focus on ESG issues. have the willingness to change if the data changes or if it is clear
• Competing organisational priorities – such as, risk management that the decision is causing significant damage to the beneficiaries’
and funding requirements that may lead to an excessive focus financial interests.
on short-term performance.
• The lack of consensus on good or best practice standards for Interviewees generally saw this wide discretion as being positive
responsible investment. for ESG integration, but some cautioned that this discretion may
make it difficult for beneficiaries to hold trustees to account.
Legally, fiduciary duty is a process test… One interviewee cited climate change as an example, noting that
beneficiaries would find it very difficult to challenge trustees’
There was consensus among all of the lawyers interviewed, decision not to take climate change into account if the trustees
across all the jurisdictions, that when evaluating whether or not had reviewed the evidence, taken advice from their investment
an institution has delivered on its fiduciary duties, courts will consultant and deemed there to be no associated risk to the
distinguish between the decision-making process and the resulting portfolio.
decision. The law is reluctant to test fiduciaries against the perfect
ANALYSING AND ASSESSING ESG RISKS: THE STAKEHOLDERS

CASE OF CLIMATE CHANGE
Fiduciaries need to be able to show that they have identified and Beneficiaries are a missing link and are likely to remain so.
assessed the risks (to companies and to their portfolios). In the case
of climate change, for example, this would require them to: The interests of beneficiaries are central to definitions of fiduciary
duty. Traditionally, beneficiaries’ best interests have been narrowly
• Show that they have recognised relevant risks (even if they are
defined as financial interests, which investors would therefore
sceptics on the issue of climate change).
often be well-placed to make their own judgements on without
• Analyse how climate change might affect investment returns consulting beneficiaries. Recent policy discussions, however, (e.g.
over the short, medium and long-term. the UK discussions stimulated by the Kay Review since 2012) have
• Explicitly manage the risks, and not assume that the risks are argued that fiduciaries should take account of their beneficiaries’
automatically managed by other risk management strategies. views as to what constitutes their best interests.
• Interrogate and challenge the individuals or organisations (e.g.
investment managers, companies) to ensure that these risks The merits of this argument were acknowledged by interviewees,
are being effectively managed. but they pointed to three major barriers to change:
• Establish processes that enable them to demonstrate the • Most beneficiaries have limited understanding of or interest in
actions they have taken. how their pensions are being invested so long as the pension
promise is being met.
• Beneficiaries are unlikely to agree on how their pension fund
should address ESG issues.
• It is difficult to engage meaningfully with beneficiaries, in
particular for large funds, which can have tens of thousands of
beneficiaries.
Some interviewees offered challenges to these assumptions:

• Pension fund trustees engage successfully with beneficiaries on
a variety of other, often highly complex, issues relating to their
retirement benefits.
• The purpose of canvassing beneficiaries’ views is not to reach
consensus on a fund’s approach to a specific ethical issue, but
to understand the importance assigned to ESG issues.
• Canvassing beneficiaries’ views could, or even should, form
part of trustees’ own due diligence processes for understanding
what ESG issues are likely to gain traction and be of investment
significance.
Some interviewees said that not engaging with beneficiaries is the

preferred approach precisely because it reduces the likelihood that
beneficiaries will pressure trustees to take action on ESG issues.
Trustees are likely to face much more scrutiny. duties continue to apply: for example, in South Africa, funds
continue to be liable for outsourced activities, so they need to
Trustee capacity, competence and professionalism were identified ensure that appropriate contracts are in place and that the fund has
as particularly important for responsible investment, and even more a right of recourse against the service provider. In other markets,
so in markets where responsible investment is relatively new or the nature of the duty to beneficiaries of insurance companies,
underdeveloped. Interviewees said that the asset owners that are investment managers and sponsoring organisations in contract-
most proactive and progressive on responsible investment tend to based schemes (i.e. where the pension provider does not have
be those where the trustees have detailed knowledge and expertise fiduciary or equivalent obligations to the beneficiary in the way that
of ESG issues. a trustee would in a trust-based scheme) is not yet fully defined.
Interviewees suggested that fiduciary duty requires trustees to be A number of interviewees expressed concern that while contract
able to show that they have identified the relevant risks to their law protections would provide certain protections for beneficiaries,
investments(including those arising from ESG issues), that they it might not deliver equivalent protection to fiduciary duty.
have put appropriate strategies in place to manage these risks
and that they have overseen and monitored the actions of those
charged with managing these risks (e.g. investment managers and THE WIDER CHALLENGES – SUSTAINABILITY AND
companies).
MATERIALITY
Legal advisers and investment consultants’ interpretation of Interviewees pointed to the important contribution that investors
fiduciary duty play a critical role. can make on sustainability issues such as climate change by
building consideration of the risks and opportunities presented by
Obtaining advice from investment consultants is a legal these issues into their investment processes, by analysing these
requirement in many countries, and many jurisdictions allow asset risks and opportunities over the longer-term and by encouraging
owners to use the fact that they followed the advice given by companies to adopt higher standards and better practices on
investment consultants as a defence in court. these issues. These actions are all likely to be consistent with their
fiduciary duties.
A recurring theme in the interviews was that the advice being
given by these consultants and advisers – in particular in the US However, they also acknowledged that public policy would be
– is often based on a very narrow interpretation of fiduciary duty. a key determinant of the rate at which investors took action
Interviewees commented that most lawyers and consultants tend (e.g. to reduce portfolio-related emissions or to invest in clean
to advise their clients that the law requires them to have exclusive technologies). They therefore suggested that investors need to
focus on financial returns, often in the erroneous belief that taking continue to engage with governments to encourage the adoption
account of ESG issues will have a negative impact on investment of policy measures to correct market failures and to require
returns. One interviewee noted: “they find it easier to say ‘no’ when companies and investors to internalise externalities as an integral
asked about these issues”. part of their fiduciary duties.
New fiduciaries may emerge from defined contribution

schemes.
In many countries, the move from defined benefit to defined

contribution pension schemes raises questions about the continued
relevance of fiduciary duty concepts. In some cases, fiduciary
The Treatment of Material and Non-material • Wider social, economic and environmental issues: These
are issues that have the potential to significantly affect the
Issues investors’ ability to deliver on its organisational or investment
When we look at ESG issues, and at how fiduciary investors might objectives but that may have limited financial impact within the
address them in their investment practices and processes, it is relevant time period. For example, these could be issues that
useful to divide them into three categories (acknowledging that affect the stability and health of economic and environmental
there is significant overlap between them): systems, or they could be issues that are, or have the potential
to be, important to beneficiaries or other stakeholders.
• Financially material issues: These are issues that the investor
sees as having the potential to significantly affect (positively or Investors that have made a commitment to responsible
negatively) the financial performance of the investment over the investment would be expected to build consideration of these
relevant time period. issues into their investment research and decision-making
processes, to play an active ownership role in the companies
Fiduciaries would expect these issues to be assessed in and other entities in which they are invested, and to engage
investment research and decision-making processes as a with policymakers to encourage the development and
matter of course. implementation of appropriate policy responses to these issues.
• Non-financially material issues: These are issues that, while Materiality is a dynamic concept, and the materiality of ESG issues
they may be important to stakeholders, if managed well, do not evolves over time. This evolution is driven by changes in legislation
present a significant threat to (or opportunity for) the business. and policy, by changes in risk and the understanding of risk, by
changes in the social, environmental and economic impacts of the
Fiduciaries would expect companies to demonstrate that they ESG issue in question, and by changes in societal (and beneficiary)
are managing these issues effectively, and should intervene expectations and norms.
if they were concerned that a failure to manage these issues
could lead to financial detriment.
A GLOBAL ROADMAP
FOR SUSTAINABLE
VALUE CREATION
Organisations need to monitor ongoing Though there are variations between countries – reflecting national
priorities, the current development of responsible investment in
debates around fiduciary duty to remain the country in question and prevailing legal requirements – our
research suggests that in the following areas progress is needed
informed of current developments. They globally:
also need to ensure that their advisers
are following these debates and that INSTITUTIONAL INVESTORS
changes are properly reflected in the • Publish commitments to ESG integration and responsible
advice being provided. investment, including explanations of how these commitments
align with fiduciary duties.
• Implement these commitments effectively in investment
processes.
• Monitor how investment managers (internal and external) are
implementing these commitments.
• Report to beneficiaries on how these commitments have been
implemented and the outcomes that have resulted.
• Ensure that trustees, boards and executives have the resources
and knowledge to hold investment managers and advisers to
account on ESG integration.
• Require companies to provide robust, credible and detailed
accounts of their management of ESG issues, and of the
financial significance of these issues.
• Engage policymakers on issues relevant to long-term
performance, including strengthened corporate reporting.
INTERMEDIARIES – LEGAL ADVISERS,

INVESTMENT CONSULTANTS (ACTUARIES),
STOCK EXCHANGES, BROKERS AND DATA
PROVIDERS
• Publish commitments to ESG integration and responsible
investment, including explanations of how these commitments
align with fiduciary duties.
• Implement these commitments effectively in research and owner disclosure requirements) and clarify that these refer to
advice provided to fiduciary clients. environmental, social and governance issues, and analyse and
• Report to fiduciary clients on how these commitments have report on how these affect investor and company performance.
been implemented and the implications for the research and • Support efforts to harmonise national and regional responsible
advice provided. investment legislation and policy instruments (e.g. stewardship
• Advise fiduciaries that, as an integral part of fiduciary duties, codes and disclosure requirements).
they need to analyse and account for long-term value drivers, • Develop an international statement or agreement on the duties
including ESG issues, in their investment practices and that fiduciaries have to their beneficiaries, reinforcing the core
processes. duties of loyalty, prudence and competence and stressing that
• Support research on the relationship between ESG issues and investors must pay attention to long-term investment value
investment performance, and on the relationship between drivers (including ESG issues) in their investment processes,
engagement and corporate performance. in their active ownership activities and in their public policy
engagement.
• Support efforts to change market views on ESG issues by
making these issues an integral part of professional training, • Support the development of guidance on implementation
through ensuring that ESG issues are an integral part of codes processes: investment beliefs, long-term mandates, integrated
of professional ethics such as the CFA, and by raising market reporting and performance.
awareness of the investment case for ESG integration.
POLICYMAKERS AND REGULATORS

• Clarify that fiduciaries must analyse and take account of ESG INTEGRATING ESG ISSUES IN COMPLIANCE
issues in their investment processes, in their active ownership WITH FIDUCIARY DUTY
activities, and in their public policy engagement.
Asset owners generally have significant freedom to decide how
• Clarify that fiduciary duty requires that investors pay attention they wish to take account of ESG issues in their investment
to long-term investment value drivers, including ESG issues. practices and processes. However, they should:
• Encourage or require institutional investors to support public • Pay close attention to decisions that lead to skews in
policy efforts promoting responsible investment. portfolios and explicitly assess the implications of these
• Require investor transparency on all aspects of ESG integration skews for the overall risk profile of the fund.
and investment practice. • Base investment decisions on credible assumptions (e.g.
• Require better corporate reporting on ESG issues and on how about future regulation) and a robust decision-making
these affect business performance over the short and long process.
term. • Be prepared to review the investment outcomes achieved.
• Heighten expectations of trustee competence and skill. • Be willing to change if the data changes or if it is clear
• Better implement existing responsible investment legislation that the decision is causing significant damage to the
and policy instruments (e.g. stewardship codes and asset beneficiaries’ interests.
COUNTRY-SPECIFIC
RECOMMENDATIONS
SUMMARY
In addition to the global recommendations for institutional investors, CANADA:
intermediaries and policymakers, we recommend the following The Office of the Superintendent of Financial Institutions
country-specific actions: Canada and the relevant pension regulators in each province
should clarify that asset owners are expected to pay attention to
long-term factors (including ESG factors) in their decision-making,
AUSTRALIA: and in the decision-making of their agents.
The Australian Prudential Regulation Authority (APRA) should
clarify that fiduciary duty requires asset owners to pay attention to The federal government and the governments of the provinces
long-term factors (including ESG factors) in their decision-making, should follow the example set by Ontario and introduce ESG
and in the decision-making of their agents. disclosure legislation. The legislation should require regulators to:
• Review progress annually.
Australian regulators should clarify that responsible investment • Explain how asset owners integrate ESG issues into their
includes ESG integration, engagement, voting and public policy investment processes.
engagement.
• Analyse how these commitments have affected the actions
taken and the outcomes achieved (where the outcomes relate
to both investment performance and to the ESG performance of
BRAZIL: the entities in which they are invested).
Comissão de Valores Mobiliários (CVM) and Associação
Brasileira das Entidades dos Mercados Financeiro e de
Capitais (ANBIMA) should for asset owners and investment EUROPEAN UNION
managers respectively:
The European Commission should provide guidance to the
• Clarify that fiduciary duty requires them to pay attention to competent member state authorities on how they should interpret
long-term factors (including ESG factors) in their decision- fiduciary duty in the national legal context. This guidance should:
making, and in the decision-making of their agents.
• Clarify that fiduciary duty requires asset owners to pay attention
• Clarify that they are expected to take account of ESG issues to long-term factors (including ESG factors) in their decision-
in their investment processes and decision-making, and to making and in the decision-making of their agents.
proactively engage with the companies and other entities in
which they are invested. • Clarify that responsible investment includes ESG integration,
engagement, voting and public policy engagement.
Superintendência Nacional de Previdência Complementar • Encourage member states to ensure that fiduciary duty and
(Previc) should strengthen its oversight and implementation of responsible investment-related legislation is harmonised and
Resolution 3.792 by analysing and reporting on the implementation consistent across Europe.
of the environmental and social issues requirements of Resolution • Encourage member states to monitor the implementation of
3.792 and its effect on investor practice and performance. legislation and other policy measures relating to fiduciary duty
and responsible investment, and report on the investment and
other outcomes that result.
GERMANY: • Strengthen the stewardship code by:

Bundesanstalt für Finanzdienstleistungsaufsicht (BaFiN) should • Making it clear that environmental and social issues are
require pension funds, pension institutions and insurers to: important drivers of long-term investment value.
• Adopt publicly available policies that explain how they address • Providing clear guidance to asset owners that outsource
ethical, social and environmental concerns in the allocation of investment management (and associated activities) on how
pension contributions. they are expected to deliver on their stewardship obligations.
• Publish a public annual report describing how these
commitments have affected the actions taken and the Corporate pension funds should sign the stewardship code and
outcomes achieved (where the outcomes relate to both make public commitments to responsible investment.
investment performance and to the ESG performance of the
entities in which they are invested).
JAPAN:
Pension funds should publicly commit to responsible investment. The Financial Services Agency (FSA) should continue to monitor
the implementation of the Japanese Stewardship Code, analysing
asset owner oversight of their investment managers’ implementation
UNITED KINGDOM: and analysing the investment and other outcomes that result from
The government should amend the Occupational Pensions the code.
Schemes (Investment) Regulations to:
The Ministry of Health, Labour and Welfare (MHLW) should require
• Clarify that fiduciary duty requires them to pay attention to public and corporate pension funds to state how they integrate ESG
long-term factors (including ESG factors) in their decision- issues into their investment decisions. As part of these requirements,
making, and in the decision-making of their agents. MHLW should commit to:
• Clarify that responsible investment includes ESG integration, • Review progress annually.
• Explain how asset owners integrate ESG issues into their
• Require asset owners to report on how they implement their investment processes.
policies and statements of investment principles. The Pensions
Regulator should ensure that asset owners provide meaningful • Analyse how these commitments have affected the actions taken
disclosure, by providing guidance on reporting and by critically and the outcomes achieved (where the outcomes relate to both
scrutinising their disclosure. investment performance and to the ESG performance of the
The Financial Reporting Council (FRC) should:
Corporate pension funds should sign the stewardship code and
• Conduct a more detailed analysis of current implementation of publicly commit to responsible investment.
the UK Stewardship Code by analysing asset owners’ oversight
of their investment managers’ implementation and by analysing Investment banks should produce more research on the drivers of
the investment and other outcomes that result from the code. long-term investment value (including ESG factors).
• Highlight those asset owners and investment managers
that it considers to be doing a good job of implementing the
stewardship code, and those whose implementation appears to
be lagging.
SOUTH AFRICA: • Reissue its 2008 bulletins on Economically Targeted

The Financial Services Board should: Investments and on Shareholder Rights, and:
• Clarify that compliance with the requirements of Regulation 28, • Clarify that asset owners’ duty is to impartially serve the
in particular those relating to ESG issues, should be seen as interests of participants and beneficiaries.
an integral part of the fiduciary duties imposed by the Pension • Clarify that the assessment of the costs and benefits of risk
Funds Act. management measures such as active ownership should
• Clarify that responsible investment includes ESG integration, explicitly consider the long-term benefits of such measures.
engagement, voting and public policy engagement. • Clarify that green investments can make important financial
• Explicitly address ESG-related competence, expertise and skills and risk mitigation contributions to investment portfolios.
in forthcoming guidance on pension fund board education. • Require asset owners to say how they integrate ESG issues into
• Require asset owners to prepare a public, annual report their investment decisions. As part of these requirements, the
describing how they have integrated responsible investment Department of Labor should commit to:
into their investment policy statements, practices and • Review progress annually.
processes, and their investment manager selection, • Explain how asset owners integrate ESG issues into their
appointment and monitoring processes. investment processes.
The Code for Responsible Investing in South Africa (CRISA) taken and the outcomes achieved (where the outcomes
Committee should strengthen oversight of the code by conducting relate to both investment performance and to the ESG
more detailed analysis of current practice, analysing the investment performance of the entities in which they are invested).
and other outcomes that result from the code.
The New York Stock Exchange (NYSE) and Nasdaq, given
their scale and influence, should strengthen their ESG disclosure
UNITED STATES: requirements for companies, in accordance with their public
The Department of Labor should: commitment to the Sustainable Stock Exchanges (SSE) initiative
to promote long-term sustainable investment and improved ESG
• Clarify that:
disclosure and performance among companies listed on their
• Fiduciary responsibility requires a long-term, risk-adjusted exchange.
approach to management of pension assets so as to deliver
sustainable retirement benefits to participants and beneficiaries
in an impartial manner.
• Asset owners should pay attention to long-term factors
(including ESG issues) in their decision-making, and in the
decision-making of their agents.
• Asset owners are expected to proactively engage with the
companies and other entities in which they are invested.
• And clarify that these actions are consistent with asset owners’
fiduciary duties.
COUNTRY ANALYSIS:
AUSTRALIA
2012 2013 2014 2015*

NOMINAL GDP ($bn)1 1,556 1,502 1,444 1,252
NOMINAL GDP (A$bn)2 1,501 1,550 1,599 1,615
119 PRI SIGNATORIES POPULATION (million)3 22.9 23.3 23.6 23.8
34 ASSET OWNERS GDP PER CAPITA (A$ /capita)4 65,527 66,529 67,8815 67,653
5
LABOUR FORCE (million)6 12.0 12.2 12.3 12.4
7
EMPLOYMENT RATE8 72.3% 72% 71.6% --
% POPULATION > 659 14% 14% 14.7% 14.9%
THE AUSTRALIAN PENSION MARKET IN NUMBERS

Australia, total investment of pension funds (A$bn)10
2,500
2,000
1,500
1,000
500
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015**
* Estimate 6 Australian Bureau of Statistics, 6202.0 - Labour Force, Australia, 2015.

** March 2015 7 OECD: Employment rate represent persons in employment as a percentage of the
1 IMF, World Economic Outlook Database, 2015. population of working age (15-64 years).
2 IMF, World Economic Outlook Database, 2015. 8 OECD, OECD Employment outlook 2015, Table B, 2015.
3 MF, World Economic Outlook Database, 2015. 9 Australian Bureau of Statistics, 3101.0 - Australian Demographic Statistics, 2014.
4 MF, World Economic Outlook Database, 2015. 10 OECD, Pension Market in Focus 2014, table 4 and APRA, Quarterly Superannuation
Statistics, March 2015.
5 OECD: The total labour force, or currently active population, comprises all persons who fulfil
the requirements for inclusion among the employed or the unemployed during a specified
brief reference period.
Australia, % AUM by type of pension scheme11
81% 81% 85%
19% 19% 16%
2012 2013 2014
Defined benefit Defined contribution
THE AUSTRALIAN INVESTMENT MARKET funds and retail funds, which are offered to the public and to
Australia, home to the world’s fourth-largest private pension funds employers by financial service providers. Approximately one third
pool, has a three pillar pension system, comprising: of superannuation money is in self-managed funds and two-thirds
in the 248 ‘large’ superannuation funds (i.e. APRA-regulated funds
• A means-tested, tax-financed (i.e. non-contributory) public age with more than five members). In fact, the superannuation market
pension that provides basic benefits. is highly concentrated with approximately half of the money in the
• Compulsory (employer contributed) pension accounts. large superannuation funds held in four large retail and the dozen
• Voluntarily-funded individual pension accounts provided by largest industry and public sector funds, all of which have more
superannuation funds and individuals’ self-managed funds. than A$10 billion in assets under management.
Since 1992 Australian employers have been required to make Portability is a core principle of the Australian superannuation
superannuation contributions to a superannuation fund on behalf system, with members generally having the right to move assets
of each employee aged between 17 and 70 (subject to certain between funds.
minimum earnings requirements). Employers who fail to do so, and
who otherwise fail to provide membership of an equivalent defined Australian superannuation funds tend to be heavily weighted
benefit scheme, incur a ‘superannuation guarantee charge’. towards domestic equities, resulting in them having large
exposures to energy, resources and financial stocks.
The types of superannuation funds in Australia include self-
managed funds (which have fewer than five members), industry
11 Tower Watson, Global Pensions Asset study 2015, Global Pensions Asset Study 2014, Global Asset Pension Study 2013.
LAW/POLICY CHANGES SINCE FRESHFIELDS • The requirements of Section 62 of the SIS Act, which requires
the fund to be maintained solely for the provision of benefits for
(2005) each member of the fund on retirement (the ‘sole purpose test’).
The legal framework for investment decision-making in Australia
• Prudential standards issued by the Australian Prudential
has not changed substantially since the Freshfields (2005) report.
Regulation Authority (APRA).
However, there have been a number of statutory and common
law developments that reinforce, and in some cases raise, the
APRA and the Australian Securities and Investments Commission
standards of professional conduct expected of superannuation
(ASIC) have published policy guides to support the mandatory
trustees and their boards.
requirements
Typically, the companies managing superannuation funds, life
The Superannuation Legislation Amendment (Trustee Obligations
insurance statutory funds and managed investment schemes are
and Prudential Standards) Act 2012 (the ‘Stronger Super’ reforms)
established under the Corporations Act 2001 (Cth) (the Corporations
amended the SIS Act to strengthen trustee duties in a number of
Act). This means that the key decision makers are subject to
ways. The changes included introducing the duty in Section 29VN
directors’ duties, including (a) exercising their powers and
to promote the financial interests of beneficiaries in relation to
discharging their duties with the degree of care and diligence that
MySuper products (discussed above) and strengthening trustee
a reasonable person would exercise if they were in that director
competence requirements by increasing the standard of care, skill
or officer’s role, (b) exercising their powers and discharging their
and diligence in Section 52(2)(b) from ‘ordinary prudent person’ to
duties in good faith in the best interests of the corporation and
‘prudent, professional superannuation trustee’. In addition to the
for a proper purpose, and (c) not improperly using their position
heightened standard of due care and diligence for superannuation
to gain an advantage for themselves or someone else or to cause
trustee directors, Australian courts have recently raised the
detriment to the corporation.
expectations of corporate directors (which include the directors of
superannuation trustees) in terms of the due diligence that they
Other requirements also apply depending on the type of fund
carry out, their knowledge and competence, and the actions that
involved. For non-self managed superannuation funds, these
they take.
include:
• The terms of the superannuation trust deed. There has been some guidance from regulators on ESG issues. In
• Trustee duties, in Section 52 of the Superannuation Industry November 2011 ASIC reissued Regulatory Guide 65 which requires
(Supervision) Act 1993 (Cth) (SIS Act), to act honestly, to product issuers to disclose whether and how labour standards
properly invest funds, to act in the best interests of the and environmental, social or ethical considerations are taken into
beneficiaries and to exercise a prescribed standard of care, skill account for investment products. APRA’s Prudential Practice Guide
and diligence and to give priority to beneficiaries where there is on Investment Governance (SPG 530), issued in 2013, stated that a
a conflict of interest. The trustee duties in section 52 are largely superannuation trustee may adopt an investment strategy that has
replicated in section 52A as covenants owed by the directors of an ESG focus, so long as it can demonstrate appropriate analysis
the trustee, which the SIS Act implies into the trust deed. to support its formulation (including being mindful of exposing the
• A duty in Section 29VN of the SIS Act to promote the financial interests of beneficiaries to undue risk). However, this guidance is
interests of beneficiaries who hold MySuper products (simple, limited to the offer of ‘ethical investment options’, and classifies
low-fee, default products for members who have not otherwise ESG factors as being ‘non-financial’.
nominated an investment trust).
PRACTITIONER PERSPECTIVES “It is the process of information

Current Practice gathering and deliberation that is critical
Interviewees commented that there is a spectrum of views and
practices in the Australian superannuation industry in relation to to satisfying the duty of due care and
ESG issues. Some of the large asset owners are very proactive on
responsible investment whereas others are not at all receptive.
diligence. The decisions that result from
that process are not the determinative
Interviewees suggested that the strengthening of the trustee
competence requirements to ‘prudent, professional superannuation issue. Rather, the question is whether,
trustee’ (in Section 52(2)(b) of the SIS Act) may strengthen the case in their oversight of fund performance
for asset owners to focus on ESG issues. However, they also noted
that there have been many other issues on the reform agenda for against its objectives, a trustee is
superannuation funds and regulators in recent years, including
conflict management and funding requirements. These may have
appropriately informed and engaged, has
resulted in due diligence and ESG issues receiving less attention, sought expert advice where appropriate,
at least to date, than might be suggested by the changes to the SIS
Act. has applied independent judgment to the
matters at hand, and has constructively
Fiduciary Duty
In prescribing the ‘sole purpose’ as being to provide benefits to
evaluated the strategic consequences
members upon their retirement, Section 62 of the SIS Act is widely of material issues using methodologies
accepted as precluding trustees from investing assets for other
purposes such as bringing about social change. and assumptions that are appropriate for
their forward-looking purpose.
“One of the issues in the definition of In ESG and other long-term drivers of
best financial interests is timeframes – investment value, it means that trustees
is it 3 years, 5 years, ‘long-term’? This must explicitly engage with the impact
is particularly important when deciding of these financial risks and opportunities
what to do about stranded assets and on their portfolios, and take actions that
about issues that we know are important are appropriate in the context of the
in the long-term but have relatively risks and opportunities presented by
little effect on short-term financial these issues.”
performance.” Sarah Barker (Special Counsel, Minter Ellison)
Danielle Press (CEO, Equipsuper)
This is reinforced by the traditional interpretation of the ‘best APRA’s role includes ensuring that superannuation funds have
interests test’ as requiring trustees to exercise their functions and appropriate investment strategies, that they implement these
powers in the best financial interests of beneficiaries. This does strategies appropriately and that they ensure that benefits are
not, however, prohibit ‘incidental advantages’ that may flow from distributed to members in an equitable manner.
properly considered and soundly-based investments. Interviewees
were also clear that the best interests test cannot be considered Our interview with APRA provided some interesting insights into
without reference to risks posed to the fund and its investments how it sees ESG issues in the context of fiduciary duty.
by ESG issues, although they acknowledged that there is a lack of
clarity around the extent to which best financial interests requires APRA noted that it generally gives funds the freedom to decide
asset owners to take account of ESG issues in their investment how they wish to take account of ESG issues in their investment
processes. There is also a lack of clarity on the timeframes over practices and processes. Within this, APRA’s view is that
which these interests are to be assessed, other than the general superannuation funds should be aware of and manage ESG-related
expectation that investors would be expected to account for risks while also being careful of decisions that lead to skews in
beneficiaries’ proximity to retirement. portfolios.
In practice, this lack of clarity has resulted in a wide range of In relation to negative screens, APRA commented that such
interpretations being adopted by market participants. Many see ESG screens, so long as they are relatively limited in number, are
issues as consistent with value creation, particularly over long-term generally unlikely to result in an unreasonable portfolio or override
time horizons, and therefore see that their fiduciary duty requires overall portfolio construction processes. While APRA accepts that
them to take a proactive approach to responsible investment. individuals will consider ethical positions, all investments and
Conversely, others prioritise short/medium term investment returns investment strategies must be based on financial considerations.
and/or see ESG issues as ‘non-financial’. APRA also commented that funds that adopt negative screens
would be expected to take account of risk-return trade-offs, of the
From a legal perspective, fiduciary duties are widely considered to need for diversification and of portfolio characteristics.
be proscriptive, rather than prescriptive, principles. That is, they are
procedural and purposive requirements, rather than obligations to In relation to issues such as stranded assets - or, more generally,
achieve particular beneficial outcomes. In practice, conduct must situations where a fund decides not to invest in a particular sector
be directed towards beneficiaries’ best interests, and due process or asset class on the basis of a long-term macroeconomic driver
and competence must be applied in decision making. This is likely - APRA acknowledged that there is often a strong investment
to require trustees to show that they have identified and assessed rationale for such decisions. However, it stressed that where
ESG-related risks to companies and to their portfolios, to have superannuation funds take decisions that expose them to specific
adopted specific measures to manage these risks, and to have risks (e.g. a high carbon portfolio, a portfolio with a weighting to
interrogated and challenged company management. renewable energy), APRA will generally expect them to explicitly
stress test the investment risks associated with these decisions.
Finally, it is important that the actions taken are clearly linked to
drivers of investment value. Interviewees cited the recent examples Finally, APRA noted that positive screens could run counter to the
of ANU and HESTA’s decisions to divest from or exclude certain ‘sole purpose’ test, and could result in asset owners not building
fossil fuel assets from their investment portfolios. They noted that efficient or diversified portfolios.
ANU was publicly criticised by many financial commentators –
and some senior politicians, including the Prime Minister – for
its decision to divest its holdings in seven domestic resources
companies on the basis of their ‘ESG ratings’. In contrast, HESTA’s
decision, which referenced long-term risk management and
members’ best interests, to exclude new investment in thermal coal
assets received little adverse commentary.
Drivers for Action • Ambiguous legal rules, in particular the absence of case
Asset owners are paying increasing attention to ESG issues in their law on the extent to which the duty to maximise benefits
investment processes and in their dialogue with companies. The for beneficiaries may be viewed as inconsistent with ESG
reasons include: investment, and on the practical import of the heightened
standard of trustee due diligence.
• The establishment of the Australian Council of Superannuation
Investors (ACSI) by a number of superannuation funds and • The limited guidance from APRA on how responsible investment
industry bodies to develop guidelines for superannuation funds should be applied in practice, raising concerns that responsible
on ESG issues and to establish corporate governance principles investment may run counter to trustees’ fiduciary duties.
for Australian-listed companies. • Historical trust instruments. The fact that the trust deeds of
• The Establishment of the ASX Corporate Governance Council. many of the large investment funds in Australia were settled at
least 20 years ago and do not contemplate ESG investment is
• The Financial Service Council’s (FSC) standards on voting
seen as increasing the risk for funds that they may not have the
disclosure and ESG risk reporting.
legal power to make ESG investments.
• Guidance from bodies such as the Australian Institute of
• The need for liquidity, diversification and dividend yield, which
Superannuation Trustees on the integration of ESG issues into
has, historically, been a very important argument for investing
decision-making.
in the resources and energy sector. This is compounded by a
• NGO campaigns on specific issues, with a number of these (e.g. commonly held view that responsible investment is the same as
on stranded assets) raising significant investment concerns, negative screening.
which are increasingly being echoed by leading Australian
brokers, consultants and advisors (such as Citi, HSBC and
Mercer).
RECOMMENDATIONS
• The likelihood that the industry will face increased demands for
In addition to the global recommendations, we recommend that:
transparency (e.g. in relation to fund holdings).
• Industry competition for members with responsible investment The Australian Prudential Regulation Authority (APRA) should
being a potential point of differentiation. clarify that fiduciary duty requires asset owners to pay attention to
• Growing consumer interest in ethical and green funds. long-term factors (including ESG factors) in their decision-making,
• Growing recognition by fund managers that ESG issues – in and in the decision-making of their agents.
particular, governance issues – are important and need to be
accounted for in investment decision-making. Australian regulators should clarify that responsible investment
• Growing recognition that responsible investment may enable includes ESG integration, engagement, voting and public policy
above benchmark returns to be achieved. engagement.
Barriers to Progress
Interviewees identified a number of reasons why trustees do not
account for ESG issues in their investment practices and processes:
• Entrenched ‘short-termism’, driven by factors such as fund
manager remuneration structures and performance/reporting
cycles.
COUNTRY ANALYSIS:
BRAZIL
2012 2013 2014 2015*

NOMINAL GDP ($bn)12 2,412 2,391 2,353 1,904
NOMINAL GDP (R$bn)13 4,713 5,157 5,521 5,954
17 ASSET OWNERS GDP PER CAPITA (R$ /capita)15 23,655 25,655 27,229 29,124
16
LABOUR FORCE (million)17 104.7 106.1 107.3 --
18
EMPLOYMENT RATE19 -- -- 64.7% --
% POPULATION > 6520 7% 8% 8% --
THE BRAZILIAN PENSION MARKET IN NUMBERS

Brazil, total investment of pension funds (R$bn)21
800
700
600
500
400
300
200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015**
* Estimate 17 WB Data, Labor force total, 2015.

** April 2015 18 OECD: Employment rate represent persons in employment as a percentage of the
13 IMF, World Economic Outlook Database, 2015. 19 OECD, How does BRAZIL compare? September 2014.
14 IMF, World Economic Outlook Database, 2015. 20 WB Data, Population ages 65 and above (% of total), 2015.
15 IMF, World Economic Outlook Database, 2015. 21 OECD, Pension Market in Focus 2014, table 4 and ABRAPP, Consolidado Estatistico Abril
2015.
Brazil, % AUM by type of pension scheme22
16% 16% 17%
10% 9% 10%
74% 75% 73%
2012 2013 2014
Defined benefit Defined contribution Variable contribution
THE BRAZILIAN INVESTMENT MARKET the Superintendence of Private Insurance (SUSEP). The National
The Brazilian stock exchange BM&FBOVESPA is the largest Superintendence of Complementary Pensions (PREVIC) supervises
exchange in Latin America and one of the largest in the world with closed funds in relation to, amongst other areas, governance,
a market capitalization of over US$800 billion. disclosure, investments and fees.
The Brazilian pension system comprises three pay-as-you-go

pillars: LAW/POLICY CHANGES SINCE FRESHFIELDS
• the public mandatory system known as the General Social (2005)
Security Regime (RGPS); Brazil was not covered by the original Freshfields report in 2005.
• the Pension Regimes for Government Workers (RPPS);
• the Private Pension Regime (RPC), which covers occupational Since 2005, the most significant regulatory change has been
and individual plans (referred to as ‘closed entities’ and ‘open Resolution 3.792, issued in 2009 by the Brazilian Monetary Council
entities’ respectively). The largest closed pension entities are (Conselho Monetario Nacional (CMN)). TheResolution requires
Previ, Petros and Funcef. closed pension funds to use due diligence, to comply with the law
and to adopt high ethical standards when making investments.
Closed pension funds are regulated by the National Regulatory The resolution also requires closed pension funds to comply with
Board for Complementary Pensions (Conselho Nacional de several governance requirements, one of which is that they must
Previdência Complementar (CNPC)) and open pension entities by state whether they take account of environmental and social issues
22 ABRAPP, Consolidado Estatistico Dezembro 2014, Consolidado Estatistico Dezembro 2013 and Consolidado Estatistico Dezembro 2012
in their investment practices. PREVIC requires pension funds to Interviewees contrasted the regulatory requirements for investment
explicitly state in their annual statements whether they comply with management with those for project financing. Of particular
the environmental and social aspects of Resolution 3.792. relevance to current investment practice is the fact that, in project
financing, banks have some responsibilities – albeit not the
primary responsibility – for the activities that they finance. Some
PRACTITIONER PERSPECTIVES interviewees commented that one of the reasons why institutional
investors have been less active on environmental and social issues
Investment Practice is the concern that they could be held liable for the impacts of the
Interviewees commented that, at this point, relatively few Brazilian companies in which they invest.
asset owners are active on responsible investment. The exceptions
are some of the larger pension funds and investment managers, Fiduciary Duty
many of whom are PRI signatories. These organisations tend
Brazil is a civil law country. The fiduciary duties of institutional
to have ESG policies and to integrate these issues, in particular
investors are defined in legislation and in the guidance and other
corporate governance, into their investment practices and
materials issued by relevant government agencies. These are
processes.
supplemented by regulations and codes created by market players.
“Governance requirements are stressed The Brazilian Federal Constitution states that private property and
the economic and social order shall ensure social welfare, and that
in Resolution CMN No. 3.792. In addition, environmental protection is a duty of the government and society.
PREVIC has developed a series of Best Within this, the government, individuals, corporations, financial
institutions and other entities all have a social role that is guided
Practice Guides (Actuarial, Investment, by principles of environmental protection and public welfare.
Accounting, Governance) that have Furthermore, the Brazilian Corporations Law (Law Nr. 6,404/1976)
has established fiduciary duties for the controlling shareholder
helped pension funds and investment (or shareholders) in a company, requiring them to exercise their
shareholding power to promote the social well-being of the other
managers to improve their governance shareholders and of the community. This law applies to all privately
practices. We intend to strengthen the and publicly held corporations organised and headquartered in
Brazil.
coverage of environmental and social
issues when we update these Guides.” The Brazilian securities market is regulated by the Comissão de
Valores Mobiliários (CVM), a federal agency. CVM issues different
Marcelo Seraphim (Pension Fund Specialist, PREVIC)
types of regulations, the most important of which is the Instrução
(a normative instruction). Once an Instrução comes into force, it
becomes the binding and enforceable regulation for the particular
Interviewees noted that, at present, very few pension funds comply subject matter in question.
with the environmental and social requirements of Resolution
3.792. This reflects the fact that – despite requiring reporting on
compliance with Resolution 3.792 – PREVIC does not analyse
implementation of these requirements.
“The market requirements imposed on Extract from the ANBIMA Code of Regulation
institutional investors are, in many ways, and Best Practices for Investment Funds
even stronger than those imposed by “Article 6 - Participating Institutions shall observe, within the ambit
legislation. Furthermore, they have real of their functions and responsibilities to the Investment Funds, the
following regulation and best practices rules:
effect; back office administrators will not I. Perform their activities by endeavouring to meet the objectives
work with fund managers that do not set out in the Investment Fund’s rules and prospectus, if
applicable, as well as to promote and disclose the information
comply with ANBIMA’s rules.” related thereto in a transparent manner, including compensation
Luciana Burr (Partner, Rayes & Fagundes) for their services, always towards enabling an easy and
accurate understanding thereof by investors;
II. Comply with all its obligations upon development of their
activities, by exercising the ordinary care that every diligent
The managers of third party assets in Brazil are bound by strong person exercises in the management of his or her own
regulatory requirements in relation to managing conflicts of interest business, and by agreeing to be liable for any breach or
and fair dealing. For example, Instrução 306 (issued by CVM in irregularity that may be committed during the period in which
1999) states that investment managers should refrain from taking they provide any services under Paragraph 1 of Article 2 hereof;
any action that may breach the fiduciary duty that they owe to their
III. Avoid practices that might harm the fiduciary relationship that
clients. Among the specific requirements of this Instrução are that
exists between the shareholders of the Investment Funds; and
investment managers should disclose potential conflicts of interest
and should perform their activities using all the care and diligence IV. Avoid practices that might adversely affect the Investment
that an active and honest person would use when managing his or Funds industry and its agents, especially as regards the
her own business. rights and duties relative to each Participating Institution’s
functions under the agreements, regulations and the prevailing
In relation to self-regulation, Associação Brasileira de Entidades legislation.”
dos Mercados Financeiros e de Capitais (ANBIMA, the Brazilian
Financial and Capital Markets Association) is recognised as a “Sole Paragraph - A fiduciary relationship is so considered the
self-regulatory body by the relevant regulatory authorities. This relationship involving trust and loyalty between the shareholders
means that ANBIMA has an independent role in relation to the of the Investment Funds and the Participating Institution, from the
development, enforcement and monitoring of its self-regulatory moment this latter is entrusted with the services to be performed
standards. ANBIMA has issued a Code of Regulation and Best by it.”
Practices for Investment Funds. The Code applies to the over 300
investment managers and the investment consultants associated
with ANBIMA, as well as those organisations that, even though not
associated, choose to be bound by the Code.
Interviewees commented that the lack of attention paid in

regulations and in codes to ESG-related issues or to responsible
“ANBIMA is currently trying to introduce
investment more generally is one of the reasons why Brazil’s requirements on social issues such as
approach to responsible investment is not as advanced as in
other markets. This is starting to change: for example, ANBIMA
slave or bonded labour into its guidance
is considering introducing social issues into its guidance on due on investment due diligence. One of
diligence. This change is, in part at least, in response to demand
from asset owners. the obstacles to progress is that asset
managers are concerned about their
Potential Drivers of Change
The Brazilian investment industry is at a relatively early stage liability for these issues. That is, what
in the adoption of ESG integration and long-term responsible might happen if their due diligence
investment. Interviewees pointed to a number of potential drivers of
change: fails to identify relevant issues, or if
• Foreign investors concerned about the social or environmental they do identify issues but do not take
performance of the companies they invest in. This may lead
to investors calling for some form of stewardship code where effective action? Brazilian legislation is
investors work together to raise the social and environmental
performance of companies.
not clear on who is responsible when
• The growing awareness of the investment implications of social issues are identified. This need for
social and environmental issues such as access to water, child
labour and workers’ rights. One interviewee commented that
regulatory certainty is a key determinant
environmental issues may start to receive greater attention in of the progress that will be made.”
coming years as Brazilian regulatory authorities start to pay José Carlos Doherty (Chief Executive Officer, ANBIMA)
greater attention to the effective enforcement of environmental
legislation.
• The PRI interviewees suggested that the PRI could play an
important role in catalysing changes through building market
awareness of ESG integration, through setting out and
communicating the investment case for investors to focus on
ESG issues in their investment practices and processes, and
through encouraging large asset owners to become signatories
(and, in turn, exerting pressure on other investment industry
actors).
• The reputational concerns of wealth managers and asset
owners. These institutional investors want to ensure that they
do not invest in companies that have corruption issues and
have started to push their investment managers to look closely
at these issues when making investments.
There is growing pressure for RECOMMENDATIONS

investment managers to engage with the
companies in which they are invested. Comissão de Valores Mobiliários (CVM) and Associação
Brasileira das Entidades dos Mercados Financeiro e de
ANBIMA sees it as inevitable that it will Capitais (ANBIMA) should, for asset owners and investment
need to pay more attention to activism/ managers respectively:
• clarify that fiduciary duty requires them to pay attention to long-
engagement in its Codes.” term factors (including ESG factors) in their decision-making,
José Carlos Doherty (Chief Executive Officer, ANBIMA) and in the decision-making of their agents;
• clarify that they are expected to take account of ESG issues
in their investment processes and decision-making, and to
Barriers and Challenges proactively engage with the companies and other entities in
which they are invested.
Interviewees identified a number of distinct barriers to progress:
• The absence of regulatory or self-regulatory requirements for Superintendência Nacional de Previdência Complementar
investors to focus on ESG issues in their investment practices (Previc) should strengthen its oversight and implementation of
and processes. Resolution 3.792 by analysing and reporting on the implementation
• Weaknesses in the implementation and oversight of Resolution of the environmental and social issues requirements of Resolution
3.792, specifically that there is no analysis of how the 3.792 and its effect on investor practice and performance.
environmental and social requirements of the Resolution have
influenced investment practice.
• Weaknesses and inconsistencies in corporate reporting on “As yet, there has been limited
environmental and social issues. This makes it difficult for
investors to take account of these issues in their investment regulatory/policy pressure for investors
processes. to focus on ESG issues/responsible
• The perception that responsible investment may limit investors’
investment universe and have a negative impact on investment investment in their investment
performance. processes. This is unlikely to change in
the near term. However, longer-term we
may see developments similar to those
seen in Europe (in terms of regulators
expecting investors to play a more active
ownership role).”
Mario Fleck (CEO, Rio Bravo Investimentos)
COUNTRY ANALYSIS:
CANADA
2012 2013 2014 2015*

NOMINAL GDP ($bn)23 1,832 1,839 1,788 1,615
NOMINAL GDP (C$bn)24 1,831 1,893 1,976 2,015
22 ASSET OWNERS GDP PER CAPITA (C$/capita)26 52,775 53,953 55,681 56,181
27
29
EMPLOYMENT RATE30 72.0% 72.4% 72.3% --
% POPULATION > 6531 14.9% 15% 15.7% 16%
THE CANADIAN PENSION MARKET IN NUMBERS

Canada, total investment of pension funds (C$bn)32
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014**
* Estimate 28 Statistics Canada, Labour force characteristics, 2015.

** Preliminary data 29 OECD: Employment rate represent persons in employment as a percentage of the
23 IMF, World Economic Outlook, 2015. population of working age (15-64 years).
24 IMF, World Economic Outlook, 2015. 30 OECD, Employment rate, 2015.
25 IMF, World Economic Outlook, 2015. 31 The World Bank Data, Population ages 65 and above (% of total), 2015.
26 IMF, World Economic Outlook, 2015. 32 OECD, Pension Market in Focus 2014, table 4 and OECD, Pension Funds in Figures, 2015.
Canada, % AUM by type of pension scheme33
7% 9% 10%
4% 4% 4%
89% 87% 85%
2012 2013 2014
Defined benefit Defined contribution Hybrid
THE CANADIAN INVESTMENT MARKET hybrid. There are also individual retirement savings plans that have
Canada’s financial services sector accounts for between 6% and preferential tax treatment (e.g. RRSP).
8% of Canadian GDP. The financial capital is Toronto, home to the
Toronto Stock Exchange. The Office of the Superintendent of Financial Institutions (OSFI) is
an independent agency of the Government of Canada, established
Canada’s pension system is characterised by a mixture of public in 1987 to contribute to the safety and soundness of the Canadian
and private pension schemes. The Old Age Security programme and financial system. OSFI supervises and regulates federally registered
the income-tested Guaranteed Income Supplement provide flat rate banks and insurers, trust and loan companies, as well as private
pensions paid through general taxation and are available to most pension plans subject to federal oversight. Approximately 6% of
people 65 and older. Workers and employers (including the self- private pension plans in Canada are federally regulated; these
employed) must also contribute to the Canada Pension Plan which are pension plans for employees and beneficiaries in federally
provides an earnings-related pension. regulated areas of employment, such as banking, inter-provincial
transportation and telecommunications. Pension plans in Canada’s
Employers may also provide pension arrangements, with the three territories (the Yukon, the Northwest Territories and Nunavut)
coverage of these being much higher in the public than the private are also regulated by OSFI.
sector. These can be defined benefit, defined contribution (which
is increasingly common, in particular in the private sector) or
33 Statistics Canada, Table 280-0014 - Registered pension plans (RPPs), members and market value of assets, by funding instrument, sector, type of plan and contributory status, annual, CANSIM
(database), 2014.
Beyond federally regulated pension plans, the Canadian provinces PRACTITIONER PERSPECTIVES
are responsible for pension regulation and supervision. The key
Current Practice
bodies in each province – acknowledging that their specific powers
vary from province to province and federally – are: The interviewees for this project commented that Canada’s large
statutory and public sector pension plans (e.g. CPPIB, bcIMC, OTPP)
• Alberta: Alberta Treasury Board and Finance
have been active on long-term responsible investment, in particular
• British Columbia: Financial Institutions Commission on corporate governance issues. However, there was also a sense
• Manitoba: Pension Commission that Canadian asset owners lag behind their European counterparts,
• New Brunswick: Financial and Consumer Services Commission both in relation to the level of attention paid to environmental and
social issues and in relation to the monitoring and oversight of their
• Nova Scotia: Department of Environment and Labour
investment managers’ activities on responsible investment.
• Newfoundland and Labrador: Service Newfoundland and
Labrador Similar comments were made about investment managers.
• Ontario: Financial Services Commission of Ontario Interviewees commented that investment managers, in particular
• Québec: Régie des rentes du Québec the larger organisations, do take corporate governance issues into
• Saskatchewan: Financial and Consumer Affairs Authority of account in their investment processes, do vote their shareholdings
Saskatchewan and do carry out some engagement on corporate governance,
individually or through collaborative initiatives such as the Canadian
Coalition for Good Governance (CCGG). However, as with asset
owners, much less attention is paid to environmental and social
LAW/POLICY CHANGES SINCE FRESHFIELDS issues.
(2005)
At the federal level there have been no changes in legislation Interviewees suggested that investment managers’ activity on
relating to responsible investment since the Freshfields report was responsible investment depends on two factors. The first is their
issued in 2005. client base. Those with a significant number of European clients are
more likely to adopt a proactive approach. The second is their size.
There are two relevant developments at the provincial level. The Most of the local investment management firms have relatively
first is that, as noted in the 2005 Freshfields report, Manitoba’s small research teams. This, in the absence of strong client demand
pension standards legislation (2005) allows ESG factors to be taken or specific mandates, limits the amount of work they can do on
into account so long as investment policy and decision making responsible investment and the level of attention they can pay to
remain consistent with prudence standards. ESG issues in their investment research.
The second is that Ontario’s pension standards legislation (PBA909) The heavy dependence of the Canadian economy on the extractives
will, starting in 2016, require pension funds to disclose in their sector (in particular oil sands) is an important influence on
investment policies ‘information about whether environmental, how Canadian investors look at climate change. Interviewees
social and governance factors are incorporated into the plan’s commented that while most Canadian asset owners oppose calls
investment policies and procedures and, if so, how those factors for divestment, they are interested in data and information that
are incorporated’. enables them to respond appropriately to calls for divestment. At
present, those Canadian asset owners that are assessing climate
change risks appear particularly interested in measuring their
carbon footprints and using this information to slowly transition to
lower carbon alternatives over time.
Fiduciary Duty Interviewees stressed the importance of fiduciary duty as an

The legal obligations on asset owners in Canada are derived from influence on asset owners’ investment practices and approach to
several sources, including the scheme’s own foundation documents responsible investment. While the specific duties depend on the
(e.g. the plan text and funding agreement), common law duties (in organisation’s mission (e.g. to maximise risk-adjusted returns,
jurisdictions outside of Quebec), pension standards legislation, and to deliver on the organisation’s pension’s promise), in practice
income tax requirements. Pension standards legislation and the fiduciary duty is interpreted as meaning that asset owners need
common law impose a fiduciary duty. The general fiduciary duties to focus primarily on the short-term financial interests of their
include a duty of loyalty to beneficiaries, as well as adherence to beneficiaries. This emphasis on relatively narrowly drawn financial
the standard of care of a prudent person. interests tends to be reinforced by the advice provided by legal
advisers and investment consultants to asset owners.
Interviewees commented that while the emphasis on financial

“Fiduciary duty is a process test. That is, returns is a constraint, it does not prevent organisations from taking
a longer-term approach (e.g. in terms of how they define their
it requires trustees to look at the range investment goals), from considering ESG issues in their investment
of issues that may affect performance research and decision-making (so long as there is a clear focus on
the financial implications of these issues) or from engaging with
over the short and long-term, to look companies or policymakers on ESG issues. They pointed to the
at how these issues may translate into activities of some of the larger Canadian pension funds (e.g. CPPIB,
bcIMC, OTPP) as evidence of the potential for asset owners to adopt
financial impact, and based on this a wider and more long-term approach. Some also noted that the
systematic adoption and implementation of responsible investment
analysis, to decide how to manage these is hindered by the lack of regulatory guidance or court decisions on
issues.” how it aligns with fiduciary duty.
Karen Lockridge (Pension Actuary, Mercer)
Drivers for Change
Interviewees commented that there has been some increase in the
level of market interest in responsible investment over the past five
“In DC schemes, it is workers and years. This has been driven by a number of factors:
savers that bear the risk. It is, therefore, • Growing awareness of the potential investment value resulting
from a focus on ESG issues.
essential that all risks (that obviously • Market demand. That many of the largest asset owners in
includes asset diversification, but ESG Canada have now signed the PRI was identified as a particularly
important signal about the importance of responsible
factors as well) are properly managed. investment to asset owners.
This is the starting point for defining • PRI reporting requirements. Signatories to the PRI commented
that the PRI reporting requirements and the fact that these
responsibility in a DC scheme.” reports are made publicly available has meant that they have
Daniel Simard (CEO, Bâtirente) needed to strengthen their systems and processes.
“The ideas of intergenerational equity (in Barriers to Progress

Interviewees pointed to a number of distinct barriers to progress:
the context of the long term investment • The lack of regulatory guidance or court decisions on how
objectives of pension funds) may result responsible investment aligns with fiduciary duty. Some
interviewees pointed to the value of having clarity on
in a broadening of the scope of pension timeframes (or the definition of ‘long-term’), the specific
fund trustees’ fiduciary duties.” activities that should form part of investors’ approach to
responsible investment, and the issues that should be
Ed Waitzer (Partner, Stikeman Elliott) considered in investment research and decision-making
processes.
• Legal advisers and investment consultants continuing to argue
• Regulatory change. Interviewees pointed to Ontario’s pension for very narrow interpretations of fiduciary duty, perhaps in
standards legislation as having a catalytic effect. It has resulted part because of the lack of explicit guidance. This has acted
in pension fund administrators – both within Ontario and as a brake on asset owners’ willingness to adopt responsible
elsewhere in Canada – having explicit conversations about ESG investment.
issues, and seeking advice from their consultants and legal
• The lack of robust evidence on the relationship between
advisers on modern interpretations of fiduciary duty.
environmental and social issues and investment performance.
• International practices. Interviewees commented that Canadian Interviewees commented that this contrasts with corporate
investors tend to evaluate themselves against leading European governance where there is good academic research on the
investment organisations, and often look to Europe for ideas investment relevance of these issues, and there has been legal
on how they might strengthen their approach to responsible clarification (e.g. in the Enron case, in the SEC decisions about
investment. the rating agencies) of governance expectations.
• The weaknesses and inconsistencies in corporate reporting
on environmental and social issues. This makes it difficult for
“Over the past 12 months, we have seen investors to take account of these issues in their investment
processes.
an increase in client and consultant • Many trustees continuing to equate responsible investment
interest in responsible investment, in with negative screening and thereby limiting their investment
universe with consequent negative effects on investment
both the US and Canada. Consultants performance.
are asking deeper questions and larger • The relatively small number of individuals in Canada with
deep expertise in areas such as ESG integration and active
clients are interested in ESG integration ownership. Some interviewees commented that this capacity is
and in how ESG analysis is used to primarily a function of market demand. They suggested that, if
general market demand was stronger and the investment case
identify risks and opportunities and to for responsible investment clearer, any capacity gaps would
engage with companies.” probably be addressed relatively quickly.
Judy Cotte (VP and Head, Corporate Governance and Responsible Investment,
RBC Global Asset Management)
RECOMMENDATIONS
The Office of the Superintendent of Financial Institutions and

the relevant pension regulators in each province should clarify
that asset owners are expected to pay attention to long-term
factors (including ESG factors) in their decision-making, and in the
decision-making of their agents.
The federal government and the governments of the provinces

should follow the example set by Ontario and introduce ESG
disclosure legislation. The legislation should require regulators to:
• Review progress annually.
• Explain how asset owners integrate ESG issues into their
investment processes.
taken and the outcomes achieved (where the outcomes relate
the entities in which they are invested).
COUNTRY ANALYSIS:
EUROPEAN UNION
As members of the European Union (EU), both the UK and Germany which requires companies with more than 500 employees to
are subject to and influenced by the legal regime and decisions of disclose information on their policies, risks and outcomes as
EU institutions. regards environmental matters, social and employee issues,
human rights, anti-corruption, bribery and board diversity.
The Occupational Pensions Directive • Directive 2007/36/EC on the Exercise of Certain Rights of
In relation to fiduciary duty, the most significant piece of European Shareholders in Listed Companies (commonly referred to as
legislation has been the 2003 Directive on the Activities and the Shareholder Rights Directive) which sets out minimum
Supervision of Institutions for Occupational Retirement Provision standards to ensure that shareholders have timely access to
(the Occupational Pensions Directive). The Directive applies relevant information ahead of general meetings and are able
to institutions for occupational retirement provision (IORPs) – to vote their holdings electronically. It also abolishes share
essentially, private sector occupational pension schemes. IORPs blocking and introduces minimum standards for the rights
are expected to invest in accordance with the ‘prudent person’ rule, to ask questions, to put items on the agenda of shareholder
and to ensure that: meetings and to table resolutions.
• Assets are invested in the best interests of members and • Directive 2014/65/EU on Markets in Financial Instruments
beneficiaries (or, in cases of a conflict of interest, in the sole (MiFID 2) – repealing Directive 2004/39/EC on Markets in
interest of the members and beneficiaries). Financial Instruments Directive (MiFID 1) – and Regulation
• Assets are invested in such a manner as to ensure the security, 600/2014 on Markets in Financial Instruments (MiFIR) which
quality, liquidity and profitability of the portfolio as a whole, and aim to make financial markets more efficient, resilient and
are invested in a manner appropriate to the nature and duration transparent by ensuring that trading, wherever appropriate,
of the expected future retirement benefits. takes place on regulated platforms, by introducing rules on high
frequency trading, by improving the transparency and oversight
• Assets are properly diversified in such a way as to avoid
of financial markets, and by introducing robust organisational
excessive reliance on any particular asset, issuer or group of
and conduct requirements.
undertakings and accumulations of risk in the portfolio as a
whole.
IORPs are also expected to draw up and, at least every three years, “As a Dutch pension fund investor APG is
review a statement of investment policy principles (SIP). The SIP
should be made available to the competent authorities and, on required to integrate ESG factors across
request, to the members and beneficiaries of each pension scheme. all its asset classes and investment
There is no requirement to explicitly reference ESG considerations
in these SIPs. processes as part and parcel of what
it does. It is core to our pension fund
Recent developments
Beyond the Occupation Pensions Directive, a number of other EU investing proposition.”
Directives are relevant to how investors implement their fiduciary Claudia Kruse (Managing Director, Head of Governance & Sustainability, APG)
duties and wider commitments to responsible investment. These
include:
• Directive 2014/95/EU on the Disclosure of Non-Financial and
Diversity Information by Certain Large Undertakings and Groups
(widely referred to as the Non-Financial Reporting Directive),
Potential future developments • Encourage Member States to ensure that fiduciary duty and
One of the recurring themes in our interviews with European-based responsible investment-related legislation is harmonised and
practitioners is that changes to European Union legislation are likely consistent across Europe.
to have an important influence on investment practice and on the • Encourage Member States to monitor the implementation of
definitions and interpretations of fiduciary duty. The changes that legislation and other policy measures relating to fiduciary duty
are currently (August 2015) under discussion include: and responsible investment, and report on the investment and
• Mobilising personal pension savings to support long-term other outcomes that result.
investment in the real economy.
• Launching the EU’s wider Capital Markets Union initiative to
make investment markets work more effectively. European Commission study on fiduciary duty
• Requiring, as part of the proposed revisions to the Shareholder In Autumn 2015, the European Commission’s Directorate-General
Rights Directive, institutional investors to disclose how they for the Environment, will publish a report, authored by Ernst &
cast their votes at company general meetings, and publish a Young, titled Resource Efficiency and Fiduciary Duties of Investors.
policy on shareholder engagement, which includes details of The report’s aim is to provide clarification and policy advice on
how shareholder engagement is integrated in their investment the integration of environmental and resource efficiency issues
strategy, how investee companies are monitored and engaged into fiduciary duties in the European Union. The report will review
with, how collective engagement is used and how conflicts of the state of fiduciary duties at EU level and, in more depth, in five
interest are managed. selected Member States. Based on this analysis, it will develop
recommendations on whether environmental and resource
• Requiring, as part of the proposed revisions to the Occupational
efficiency issues should be taken into account proactively in
Pensions Directive, IORPs to (a) improve their risk management
fiduciary duties and indicate concrete steps at EU and Member
so that potential vulnerabilities in relation to the sustainability of
State level to achieve such integration.
the pension scheme can be properly understood and discussed
with the competent authorities, (b) include consideration of new
or emerging risks (e.g. climate change) in their risk evaluations,
and (c) ensure that members or beneficiaries are informed
about how environmental, climate, social and corporate
governance issues are considered in the investment approach.
RECOMMENDATIONS
The European Commission should provide guidance to the

competent Member States authorities on how they should interpret
fiduciary duty in the national legal context. This guidance should:
• Clarify that fiduciary duty requires asset owners to pay attention
to long-term factors (including ESG factors) in their decision-
making and in the decision-making of their agents.
• Clarify that responsible investment includes ESG integration,
COUNTRY ANALYSIS:
GERMANY
2012 2013 2014 2015*

NOMINAL GDP ($bn)34 3,535 3,731 3,859 3,413
NOMINAL GDP (€bn)35 2,749 2,809 2,903 3,015
17 ASSET OWNERS GDP PER CAPITA (€/capita)37 34,150 34,784 35,805 37,061
38
40
EMPLOYMENT RATE41 72.7% 73.5% 73.8% 74.3%42
% POPULATION > 6543 20.6% 20.7% 20.8% 21.6%44
THE GERMAN PENSION MARKET IN NUMBERS

Germany, total investment of pension funds (€bn)45
200
180
160
140
120
100
80
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014**
* Estimate 39 Startseite - Statistisches Bundesamt (Destatis), Labour Market, 2015 and WB data, Labor
** Preliminary data force, total, 2014.
34 IMF, World Economic Outlook, 2015. 40 OECD: Employment rate represent persons in employment as a percentage of the
population of working age (15-64 years).
35 IMF, World Economic Outlook, 2015.
41 Eurostat, Labour market and Labour force survey (LFS) statistics, 2014.
42 EC, The 2015 Ageing Report, Table III.5.1: , EC-EPC (AWG) 2015 projections Germany, 2014.
43 Eurostat, proportion of population aged 65 and over, 2015.
38 OECD: the total labour force, or currently active population, comprises all persons who fulfil
the requirements for inclusion among the employed or the unemployed during a specified 44 EC, The 2015 ageing report, Table III.5.1: , EC-EPC (AWG) 2015 projections Germany, 2014.
brief reference period. 45 OECD, Pension Market in Focus 2014, table 4 and OECD, Pension Funds in Figures, 2015.
Germany, % AUM by type of pension scheme46
100% 100% 100%
2012 2013 2014
Defined benefit
THE GERMAN INVESTMENT MARKET • Pension funds which are separate legal entities to the
Historically, Germans relied predominantly on the pension benefits sponsoring entity. Pension funds can be set up by a single
provided by statutory pension insurance. This is beginning company, a financial services provider or by an industry-wide
to change and the German public pay-as-you-go system is pension scheme sponsored by the employers’ association and
increasingly being supplemented by private systems. the unions.
• Support funds (‘Unterstutzuengskassen’) where the employee
German employers can choose between as many as five different has no legal claim against the support fund but directly against
methods of financing and organising pension schemes. These are: the sponsoring employer. Support funds can be sponsored by a
• Direct pension promises, usually funded via book-reserve single company or can be established as a group support fund
accruals, where the employer promises to pay the employee a that is then used by several companies.
certain amount on retirement.
The Federal Agency for Financial Services Supervision
• Direct insurance where the employer takes out and contributes (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) is the
to a life insurance policy on behalf of the employee. The financial supervisor responsible for banking, insurance and
employee has a direct entitlement to the benefits accrued under securities regulation and supervision.
the contract against the insurance company.
• “Pensionskassen”, which are special insurance companies that
serve one or several employers.
46 Tower Watson, Global Pensions Asset study 2015, Global Pensions Asset Study 2014, Global Pensions Asset Study 2013 and OECD, Pension Market in Focus 2014, figure 7. Pension plans in
Germany can be DB plans or hybrid DB plans, but the split is not available by AUM. More information about pension plans is available in the EIOPA-BoS-13-59 Excel Spreadsheet online here.
LAW/POLICY CHANGES SINCE FRESHFIELDS (2005) organisations were considered more likely to explicitly account for
Pensions and insurance funds remain subject to the German ESG issues in their investment processes. This is likely to be driven
Insurance Supervision Act (Versicherungsaufsichtsrecht (VAG)), by commercial (i.e. client demand) and reputational imperatives.
which has undergone only minor changes since 2005.
Mutual funds are now subject to the German Capital Investment “When we developed our responsible
Act (Kapitalanlagegesetzbuch – KAGB) which implements
the Alternative Investment Fund Manager Directive (AIFMD) investment approach, we looked at the
and integrates the Undertakings for Collective Investments in
Transferable Securities Directives (UCITSD) in Germany. The KAGB
Freshfields report on fiduciary duty and
replaces the German Investment Act as the central legal regime for we also looked at the PRI signatory list.
mutual funds.
The Freshfields report provided us with
Even though the German legislator has not introduced legally the confidence that our approach would
binding principles on responsible investment for pension
institutions or insurance funds, the amendments to the VAG in not breach our fiduciary duties. The fact
2005 require pension funds and Pensionskassen to inform the
entitled employees (i.e. the beneficiaries) if and how ESG issues are
that APG, PGGM, Norges Bank etc were
considered in investment decisions, prior to the conclusion of the all PRI signatories provided us with
contract and subsequently on an annual basis. The legislator also
made it clear that pension funds and Pensionskassen are expressly confidence that responsible investment
permitted to take account of ESG considerations in their investment was an appropriate strategy for asset
practices and processes.
owners such as BVK.”
Andreas Hallermeier (Sustainability Manager and Assistant to the CIO, Bayerische
PRACTITIONER PERSPECTIVES Versorgungskammer (BVK))
Current Practice
Some interviewees commented that Germany is something of a Interviewees commented that relatively few German investors
laggard in terms of the proportion of investment organisations that – with the exception of some of the large investment managers
have signed the PRI. They suggested that this reflects the fact that – engage with companies. Interviewees pointed to a number of
the actions and activities of German asset owners tend to be driven different factors:
by formal legal requirements and that, in the absence of legal
• The absence of legal requirements to engage with companies,
requirements, the default is to carry on with business as usual.
and the absence of legal provision that would allow BaFin to
They agreed that there is a general reluctance to take on voluntary
require investment organisations to engage with companies.
commitments.
• There is not yet a culture of engagement between German
Investor capacity, expertise and knowledge of responsible investors and the companies in which they are invested.
investment and ESG issues is mixed. Interviewees noted that most • The commonly held view among investors that it is the state’s
have yet to develop formal responsible investment or ESG-related responsibility to ensure that companies are appropriately
policies or to establish governance processes and systems to governed and manage their environmental and social issues
implement these policies. Larger or more internationally oriented effectively.
• Capacity constraints, with only the largest funds having the

ability and the resources to engage with companies and/
“BaFin monitors the requirement that
or to effectively delegate and oversee the engagement being retail funds publish the rules that govern
conducted by their investment managers.
how the fund is invested.
• Limited evidence on the effectiveness of engagement in the
German market.
Legal Framework
Where a fund makes investments that
German law contains detailed provisions concerning the duties have a particular implication for the
owed by pension funds and investment funds to their clients and
beneficiaries. The central requirement is that these funds need to
risk profile of the fund (e.g. overweight
invest their assets in the best interests of investors. This is defined carbon-intensive industries and so
as financial best interests taking account of the risks associated
with the investments. In broad terms, pension funds must ensure with a significant exposure to carbon
that the highest possible security and profitability are guaranteed, regulation), BaFin will look closely at
that they have sufficient liquidity, that risks are effectively managed
and that investments are managed professionally in line with the how these risks are being managed
fund’s investment principles. and the implications for the overall risk
Interviewees were clear that legislative requirements do not profile of the fund.
require ESG issues to be explicitly considered in the investment
decision-making for pension funds and insurance reserves. They
acknowledged that these funds are permitted to take account of BaFin does not take a position on
these issues, so long as they continue to comply with the principles
of the fund (in particular those relating to security and profitability). whether funds should or should not
Broadly similar duties and interpretations apply to mutual funds.
invest in particular companies or sectors
That is, they need to act in the sole interest of their investors (e.g. renewable energy, nuclear energy,
and the integrity of the market when performing their activities,
they need to perform their activities with due expertise, care weapons, child labour) but expects
and conscientiousness, and they need to endeavour to avoid funds to be clear on the risks that these
and resolve conflicts of interest. In a similar manner to pension
and insurance funds, there is no explicit regulatory obligation on investments create and to have a clear
mutual funds to implement provisions covering ESG issues in their
investment decisions.
strategy for managing these risks.”
Thomas Neumann (Head of Investment Supervision, Federal Financial Supervisory
Authority – BaFin)
Conversely, ESG principles are not excluded from the decision
making process per se. Provisions covering ESG issues can be
integrated in investment decisions of mutual funds in a legally
As noted above, pension funds, pension institutions and private
binding manner if its terms and conditions determining the
pension insurers do have to provide information, prior to the
relationship between the capital investment company and the
conclusion of the contract and subsequently on an annual basis,
investor explicitly refer to them, and provided that the scope and
to their beneficiaries and clients on whether and how they address
application of the mandate is sufficiently detailed.
ethical, social and environmental concerns in the allocation of that, if market demand was stronger and the investment case for
pension contributions. However, these requirements do not mean responsible investment clearer, any capacity gaps would probably
that these funds need to have a sustainable investment policy or be addressed relatively quickly.
that they are under obligation to take account of these issues in
their investment practices and processes. Drivers for Change
It is important to recognise that some German investors have
There have been a number of self-regulatory or soft law initiatives made commitments to responsible investment and seventeen
in Germany. For example, the German Environment Ministry has asset owners have signed the PRI. This suggests that the current
issued a guidance document on the PRI Principles, and the German German regulatory framework is, at the least, not an obstacle
Association for Investment and Asset Management (BVI) has to organisations that want to adopt a responsible investment
published Guidelines for Responsible Investment. However, these approach. However, interviewees were clear that, in the absence of
documents are not legally binding and they do not have particular explicit legislation requiring ESG integration or formal legal opinion
standing in legal proceedings. that establishes the principle that ESG integration is required,
significantly increasing the number of institutional investors with
In addition, mutual funds and pensions funds can declare their commitments to responsible investment is likely to take a long
compliance with the German Sustainability Code (“Deutscher time. They were also clear that self-regulatory initiatives (e.g. a
Nachhaltigkeitskodex”), which explicitly focuses on ESG aspects. German Stewardship code along the lines of those developed in the
By publishing declarations of conformity to the Sustainability Code, UK and Japan) are unlikely to make a substantial difference.
the funds can demonstrate to current and potential investors
their commitment to specific ESG issues, such as environmental Interviewees cautioned against relying too much on changing
protection, safeguarding workers’ rights and the protection of German legislation, given that changing legislation is likely to be
human rights. a slow process. They did suggest that European legislation, in
particular the Shareholder Rights Directive, offered the potential to
Barriers accelerate the process of change, given that this legislation needs
Interviewees were clear that the primary barrier to progress in to be adopted into German law.
Germany is the absence of formal legal requirements on asset
owners and insurance companies to (a) examine long-term
investment value drivers (including ESG issues) in their investment
processes, (b) engage with the companies or other entities in which “In our view it is difficult to attribute any
they are invested. effect on alpha generation by focusing
Some interviewees also pointed to weaknesses in the evidence on ESG issues. Our primary reason for
base for responsible investment. They pointed, in particular, to
the lack of robust evidence on the relationship between ESG
focusing on these issues is to enable us
issues and investment performance, and the lack of evidence to better manage our risks by reducing
that ESG integration or active ownership add value to investment
performance. volatility and generating better risk-
adjusted returns.”
A number of interviewees expressed concern about the ESG-related
Andreas Hallermeier (Sustainability Manager and Assistant to the CIO, Bayerische
capacity, expertise and resources of German investors, although Versorgungskammer (BVK))
they acknowledged that this was probably a reflection of the
relative lack of demand for responsible investment. They suggested
RECOMMENDATIONS
Bundesanstalt für Finanzdienstleistungsaufsicht (BaFiN) should

require pension funds, pension institutions and insurers to:
• adopt publicly available policies that explain how they address
ethical, social and environmental concerns in the allocation of
pension contributions;
• publish a public annual report describing how these
commitments have affected the actions taken and the
outcomes achieved (where the outcomes relate to both
investment performance and to the ESG performance of the
Pension funds should publicly commit to responsible investment.

COUNTRY ANALYSIS:
UNITED KINGDOM
2012 2013 2014 2015*

NOMINAL GDP ($bn)47 2,624 2,680 2,945 2,853
NOMINAL GDP (£bn)48 1,655 1,713 1,788 1,853
43 ASSET OWNERS GDP PER CAPITA (£/capita)50 25,985 26,731 27,714 28,530
51
53
EMPLOYMENT RATE54 71.0% 71.5% 72.9% 73.3%
% POPULATION > 6555 17.0% 17.4% 17.7% 17.9%
THE UK PENSION MARKET IN NUMBERS

United Kingdom, total investment of pension funds (£bn)56
1,800
1,600
1,400
1,200
1,000
800
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014**
* Estimate 52 Office for National Statistics, Labour Market, 2015.

** Preliminary data 53 OECD: Employment rate represent persons in employment as a percentage of the
48 IMF, World Economic Outlook Database, 2015. 54 Office for National Statistics, Employment, 2015.
49 IMF, World Economic Outlook Database, 2015. 55 Office for National Statistics, Population Estimates for UK, England and Wales, Scotland and
Northern Ireland, Mid-2013 – SUPERSEDED, 2015.
50 IMF, World Economic Outlook Database, 2015.
56 OECD, Pension Market in Focus 2014, table 4, 2014 and OECD, Pension Funds in Figures,
51 OECD: The total labour force, or currently active population, comprises all persons who fulfil 2015.
UK, % AUM by type of pension scheme57
26% 28% 29%
74% 72% 71%
2012 2013 2014
THE UK INVESTMENT MARKET launched, aimed at employees who do not have access to a good
The UK is home to the world’s second largest fund management quality work based pension scheme.
industry and third largest insurance sector. The FTSE 100 has a
market capitalisation of £4 trillion. The key regulators are the Financial Reporting Council (FRC), the
Financial Conduct Authority (FCA), and the Pensions Regulator. The
The UK state pension system comprises the basic State Pension (a principal sources for UK law are Parliamentary legislation, common
flat-rate payment that requires a contribution record of 44 years law and the European Union.
to receive full benefits), the State Second Pension and the Pension
Credit. The government is planning to replace this system with a
single state pension. LAW/POLICY CHANGES SINCE FRESHFIELDS
(2005)
The state pension system is supplemented by voluntary
There have been no significant changes to UK law regarding
occupational and voluntary personal pension components. Since
fiduciary duty since 2005, other than the adoption of the
October 2012, the government has begun phasing in automatic
Occupational Pensions Schemes (Investment) Regulations 2005
enrolment, which will result in all employees being placed in a
(the Bill that led to these Regulations was discussed in the 2005
pension scheme unless they actively decide to opt out. A number
Freshfields report).
of new low-cost defined contribution pension vehicles are being
57 Tower Watson, Global Pensions Asset study 2015, Global Pensions Asset Study 2014, Global Asset Pension Study 2013.
There have, however, been two important developments; (a) the term decision-making, trust and stewardship to protect savers’
introduction of the Stewardship Code in 2010, and (b) the inquiries interests. The report recognised the essential role that fiduciary
into the fiduciary duties of institutional investors. duties play in the promotion of such a culture but highlighted the
damage being done by misinterpretations and misapplications of
The Stewardship Code was introduced in 2010 with the aims fiduciary duty in practice.
of building a critical mass of investors that were willing and
able to engage with the companies in which they invested, In response, the government asked the Law Commission to
of increasing the quantity and quality of engagement, and of investigate the subject of fiduciary duty in more detail. In 2014,
increasing accountability down the investment chain to clients the Law Commission published its report, Fiduciary Duties of
and beneficiaries. The Code comprises seven, comply-or-explain, Investment Intermediaries. The report concluded that, among
elements as follows: other things, (a) trustees should take into account wider factors
1. Institutional investors should publicly disclose their policy on relevant to long-term investment purposes, including ESG factors
how they will discharge their stewardship responsibilities. relevant to financial returns, and (b) while the primary focus of
pension trustees should be the pursuit of financial returns, trustees
2. Institutional investors should have a robust policy on managing
were able to take into account wider considerations – including
conflicts of interest in relation to stewardship, and this policy
ESG issues relevant to financial returns, macroeconomic factors,
should be publicly disclosed.
non-financial factors (such as quality of life and ‘purely ethical’
3. Institutional investors should monitor their investee companies. concerns) and the views of beneficiaries – provided that such
4. Institutional investors should establish clear guidelines on when decisions do not cause significant financial detriment. The Law
and how they will escalate their stewardship activities. Commission acknowledged that the law on fiduciary duties is
5. Institutional investors should be willing to act collectively with “complex, difficult to find and not well known” and that this “may
other investors where appropriate. lead trustees to be overly narrow in their approach to investment
factors and to their beneficiaries’ concerns”.
6. Institutional investors should have a clear policy on voting and
on the disclosure of their voting activity.
Following the publication of the Law Commission’s report, the UK
7. Institutional investors should report periodically on their government conducted a formal consultation on how the law on
stewardship and voting activities. investments in occupational pension schemes might be amended.
At the time of writing (August 2015), the consultation has closed
All UK-authorised investment managers are required under the and the government is reviewing the submissions received.
FCA’s Conduct of Business Rules to produce a statement of
commitment to the Stewardship Code or to explain why the Code
is not appropriate to their business model. By the end of 2014, the
Stewardship Code had almost 300 signatories, including over 200 PRACTITIONER PERSPECTIVES
investment managers and over 80 asset owners. Fiduciary Duty
The fiduciary duties of pension fund trustees emerge from the
There has been an extensive discussion in the UK about the common law and from the specific legislation relating to pension
fiduciary duties of institutional investors. In the wake of the 2008 funds. The heart of the common law duty is the duty of loyalty,
global financial crisis, Professor John Kay was commissioned which is generally seen as including the avoidance of conflicts of
by the UK government to conduct a review of the structure and interest, the duty of confidentiality and the obligation not to profit by
operation of UK equity markets. His report, The Kay Review of UK virtue of their position at the expense of the principal.
Equity Markets and Long-Term Decision Making: Final Report,
published in July 2012, emphasised the need for a culture of long-
In relation to pensions, trustees and their agents must ensure they The duty to act prudently has been modified for occupational
act prudently, which is understood as both regulating the level of pension funds (under the 2005 Occupational Pension Schemes
risk that may be accepted on beneficiaries’ behalf and imposing a (Investment) Regulations) so that trustees must ‘ensure the security,
‘duty of care’ that decision makers must apply when making their quality, liquidity and profitability of the portfolio as a whole’ and
investment decisions. Essentially those under a fiduciary duty must: ensure that assets are properly diversified.
• Exercise the ‘care, skill and diligence’ a prudent person would
exercise when dealing with investments for someone else for The Law Commission’s 2014 Report stated that the primary
whom they feel ‘morally bound to provide’. concern of trustees must be to generate appropriate risk-adjusted
returns. In doing so, trustees should take into account factors that
• Apply the special knowledge and experience they possess
are financially material to the performance of an investment, which
or, if they are professional trustees, the skills expected of a
may include ESG factors. Interviewees commented that there
professional trustee.
appears to be an emerging consensus among legal practitioners
• Have regard to the need for diversification of investments and and investment professionals that the integration of ESG factors
have regard to the suitability of each investment. into investment decision-making will become the norm even if not
• Obtain and consider proper advice on certain matters, such prescribed by the law.
as whether an investment complies with the Statement of
Investment Principles required for occupational pensions.
• Take account of all relevant considerations and ignore irrelevant
considerations. Interviewees suggested that this would require
“UK local authorities have obtained a
attention to be paid to those factors that could materially QC opinion which concluded that it is
influence the performance of the investment or investments in
question over the relevant time horizon. not appropriate for local authorities to
• Act reasonably by being able to show that they have weighed divest on ethical grounds if it causes
up the considerations that they have identified as relevant and
arrived at a decision that could not be said to be irrational, financial detriment. However, based on
perverse or absurd. the advice received, we have concluded
that the main elements of our approach
“Mercer encourages all clients to take to responsible investment – voting our
a long-term perspective (where long- holdings, engaging with companies,
term may refer to the life of the fund for investment managers and policymakers
pension funds or in perpetuity for certain on financially material ESG issues– are
foundations).” entirely compatible with our fiduciary
Lucy Tusa (Principal, Mercer) duties.”
Mark Chaloner (Assistant Director – Investments, West Midlands Pension Fund)
Despite this, fiduciary duty continues to be advanced as a reason of emphasis suggests that these issues are of significantly less
why asset owners cannot integrate ESG issues into their investment importance than corporate governance as drivers of long-term
processes or cannot engage with companies. Interviewees investment value. The second is that the Code is seen as primarily
commented that this partly reflects the absence of a permissive relevant to organisations that engage directly with companies,
or positivist definition of fiduciary duty in legislation (i.e. one that and less relevant to organisations that outsource investment
requires asset owners to take action on ESG issues). It also reflects management (and associated activities) to their investment
the reality that asset owners face a whole series of practical managers. The Code does not explain how these organisations
challenges, including resource constraints, pension deficits, and (i.e. those that delegate authority) are expected to deliver on their
extensive compliance requirements. These challenges mean that, stewardship obligations.
in the absence of strong regulatory or other drivers, asset owners
are often reluctant to focus attention or resources on responsible Current Practice
investment. UK asset owners, in particular the larger funds, increasingly
see ESG integration and stewardship as standard parts of their
In relation to the Stewardship Code, interviewees commented that investment processes. For example, in its 2014 review of the
being a signatory to the Code is now a standard expectation of Stewardship Code, the FRC noted that the proportion of asset
asset owners and investment consultants in the UK market. While owners where ‘all’ or ‘some’ mandates refer to stewardship had
the Code has sent a clear signal that asset owners and investment increased to 83% (from 71% in 2012 and from 65% in 2011).
managers are expected to engage with the companies in which Interviewees pointed to a similar trend in relation to the PRI, with
they are invested, relatively little attention has been paid to the some commenting that being a PRI signatory is now seen as a
manner in which the Code is being implemented by signatories. core expectation of investment managers looking to attract UK
institutional clients.
“The argument that ESG integration is Despite these positive signs, a number of interviewees commented
that it is not clear how asset owners’ responsible investment-
part of good governance for pension related activities are monitored or whether their performance on
funds has been broadly supported responsible investment affects appointment and reappointment
decisions. This is compounded by the focus of most asset owners
across the political spectrum. In fact, on short-term investment performance.
ministers of all parties have seen ESG In this context, it is important to highlight the publication in early
integration as non-problematic.” 2015 of A Guide to Responsible Investment Reporting in Public
Equity. The guide was supported by sixteen UK pension funds,
including BT Pensions Scheme, Environment Agency Pension
Fund, Merseyside Pension Fund, National Employment Savings
Trust (NEST), Pension Protection Fund, Railpen, USS and West
Interviewees also pointed to two specific content issues with the
Midlands Pension Fund. The participating organisations intend
Stewardship Code. The first relates to the lack of explicit attention
using the guide to inform their engagement with, and monitoring of,
paid to environmental and social issues in the Code. This lack
both current and prospective fund managers’ approaches to ESG
integration and stewardship.
“The active ownership and responsible Finally, transparency remains an issue. Many asset owners provide
little insight into, for example, how company engagement links to
investment demands on asset managers their investment decision-making or how ESG integration influences
their investment performance. The FRC reached similar conclusions
(even passive managers) are only in its 2014 review of the Stewardship Code, finding that not all
going to grow. At the same time, there signatories were reporting against all seven principles of the Code,
that there was significant variation in the quality of information
is downward pressure on fees from provided by those that did report, and that many organisations had
all quarters, making this a very tough not even updated their information to reflect changes made to the
Code in 2012.
environment for investment managers.”
Lucy Tusa (Principal, Mercer) Barriers to Progress
• The lack of clear legal guidance that asset owners should pay
Interviewees also highlighted the variation in asset owners’ attention to long-term factors and considerations, including ESG
capabilities on ESG issues. Some are seen as very sophisticated, issues, in their decision-making and in the decision-making of
with their approach to ESG integration and responsible investment their agents.
being clearly linked to their organisational objectives. For others,
• The lack of detailed oversight of the Stewardship Code at the
the approach is much less strategic and much more driven by
aggregate level (i.e. how is investor engagement affecting
factors such as ‘needing to comply with PRI’.
corporate practice?) and at the level of the individual investor
(i.e. how do investors compare to each other?).
• The perception – often reinforced by consultant and legal
“The Law Commission review has advice – that fiduciary duty permits only the maximisation of
made it clear that investors should financial returns.
• The lack of explicit attention on environmental and social issues
do more engagement and should pay in the Stewardship Code.
more attention to long-term investment • The tendency of investors to focus on corporate governance
issues (in particular remuneration), to the relative exclusion
returns/performance. The reality is that of social and environmental issues (perhaps with the
asset managers – because of their exception of climate change). This reflects perceptions on the
relative importance of these issues to long-term investment
resources, capabilities – need to lead performance, as well as the practical challenges associated
with assessing how environmental and social issues affect
these efforts. But it does require asset long-term valuations.
owners to press them to do so.” • Capacity needs in the investment industry. For example, asset
David Styles (Head of Corporate Governance and Stewardship, Financial Reporting owners need to develop their ability to scrutinise and hold
Council) investment managers to account for their approach to ESG
integration.
“Fiduciary duty is a trust law concept, Drivers for Change

Interviewees agreed that it is likely that more UK institutional
whereas an increasing proportion of investors will conclude that responsible investment is aligned
the pensions industry is now contract- with their fiduciary duties. They expect this to be driven by a
combination of peer pressure, market demand, reputational
based, with the majority of institutional pressure (e.g. not wanting to be on the front page of the FT) and
assets being managed by organisations regulatory pressure (e.g. the FRC paying more attention to the
implementation of the Stewardship Code). They also agreed that
that do not see themselves as being progress could be accelerated if the UK government were to clarify
that asset owners’ fiduciary duty requires them to pay attention to
bound by fiduciary duties. Contract- long-term factors (including ESG issues) in their decision-making,
based approaches, notwithstanding the and in the decision-making of their agents.
rhetoric, have much lower standards of

fiduciary duty and the FCA rules do not RECOMMENDATIONS
replicate the fiduciary standards that
apply to trust-based pension funds.” The government should amend the Occupational Pensions
Bethan Livesey (Policy Officer, ShareAction)
Schemes (Investment) Regulations to:
• clarify that fiduciary duty requires them to pay attention to long-
term factors (including ESG factors) in their decision-making,
and in the decision-making of their agents;
“The Law Commission stated that taking • clarify that responsible investment includes ESG integration,
account of ESG issues is permissible engagement, voting and public policy engagement;
• require asset owners to report on how they implement their
and that members’ views can be taken policies and statements of investment principles. The Pensions
into account. The UK government has Regulator should ensure that asset owners provide meaningful
disclosure, by providing guidance on reporting and by critically
used this to argue that legislation is scrutinising their disclosure.
not required (although it could send
a stronger signal by replicating the
relevant company law requirements in
pensions law).”
The Financial Reporting Council (FRC) should:

• conduct a more detailed analysis of current implementation of
the UK Stewardship Code by analysing asset owners’ oversight
of their investment managers’ implementation and by analysing
the investment and other outcomes that result from the code;
• highlight those asset owners and investment managers
that it considers to be doing a good job of implementing the
stewardship code, and those whose implementation appears to
be lagging;
• strengthen the stewardship code by:
• making it clear that environmental and social issues are
important drivers of long-term investment value;
• providing clear guidance to asset owners that outsource
investment management (and associated activities) on
how they are expected to deliver on their stewardship
obligations.

make public commitments to responsible investment.
COUNTRY ANALYSIS:
JAPAN
2012 2013 2014 2015*

NOMINAL GDP ($bn)58 5,954 4,919 4,616 4,210
NOMINAL GDP (¥bn)59 475,110 480,128 487,882 500,736
5 ASSET OWNERS GDP PER CAPITA (¥/capita)61 3,723,127 3,770,409 3,839,758 3,951,241
62
64
EMPLOYMENT RATE65 70.6% 71.7% 72.7% 72.5%
% POPULATION > 6566 24% 25% 26.1% 26.4%
THE JAPANESE PENSION MARKET IN NUMBERS

Japan, total investment of pension funds (¥bn)67
150,000
145,000
140,000
135,000
130,000
125,000
120,000
115,000
110,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014**
* Estimate 63 Statistics Bureau of Japan, Labour Force Survey, 2015.

** Preliminary Data 64 OECD: Employment rate represent persons in employment as a percentage of the
59 IMF, World Economic Outlook Database, 2015. 65 Statistics Bureau of Japan, Labour Force Survey, table 16, 2015.
60 IMF, World Economic Outlook Database, 2015. 66 Statistics Bureau of Japan, Population Survey by Age, 2015.
61 IMF, World Economic Outlook Database, 2015. 67 OECD, Pension Market in Focus 2014, table 4 available here and OECD, Pension Funds in
Figures, 2015.
Japan, % AUM by type of pension scheme68
98% 97% 97%
2012 2013 2014
THE JAPANESE INVESTMENT MARKET funded by contributions from the employer companies, although
Tokyo is the fifth largest investment management market, the fifth employees also occasionally make contributions.
largest banking market and the eighth largest insurance market
in the world. The Japan Exchange Group is the third largest stock The key regulators are the Financial Services Agency (FSA) and
exchange globally with a market capitalisation of over US$4 trillion the Ministry of Health, Labour and Welfare (MHLW). The FSA is
as of October 2014. responsible for policymaking for the financial system and for the
inspection and supervision of private sector financial institutions
Japan’s pension system comprises a two-tiered public system and other market participants, including exchanges. The MHLW
and a private system. The two public pensions are the National is responsible for the maintenance and promotion of the health,
Pension (a basic pension, paid for through employee taxes and labour and welfare of the Japanese nation including the public and
general taxation) and the Welfare Pension Insurance, funded by corporate pension systems.
contributions from employers and employees. The assets of these
two public schemes are managed by the Government Pension
Investment Fund (GPIF). GPIF, with approximately ¥140trillion in LAW/POLICY CHANGES SINCE FRESHFIELDS
assets under management, is the world’s largest pension fund. (2005)
There have been no changes in legislation relating to responsible
Private corporations often offer additional pension benefits on the
investment since the Freshfields report was issued in 2005.
top of those offered by the public pensions. These funds are usually
68 Tower Watson, Global Pensions Asset study 2015, Global Pensions Asset Study 2014, Global Pensions Asset Study.
Japan has, however, adopted two voluntary codes that are of direct PRACTITIONER PERSPECTIVES
relevance to responsible investment and ESG integration. These
are the Stewardship Code (introduced in 2014) and the Corporate Current Practice
Governance Code (introduced in 2015, which sets out fundamental Interviewees agreed that there is growing interest in responsible
principles for effective corporate governance at listed companies investment and stewardship (engagement) in Japan. They noted
in Japan, including a requirement that companies should take that asset owners – in particular public pension funds – are starting
appropriate measures to address sustainability issues). The to pay much more attention to ESG issues in their investment
codes were introduced as part of a wider programme of policies practices, and are starting to ask questions of their investment
(commonly referred to as ‘Abenomics’) directed at stimulating managers.
economic growth.
The Stewardship Code states that institutional investors should aim

to ‘enhance the medium-to long-term return on investments for
“ESG analysis is very new for most
their clients and beneficiaries by improving and fostering investee Japanese investment managers. As a
companies’ corporate value and sustainable growth through
constructive engagement, or purposeful dialogue’. The Code requires consequence, Secom does not want to
institutional investors to have clear policies on how they fulfil their put too much pressure on investment
stewardship responsibilities, on how they manage conflicts of
interest and on how they vote their shareholdings. It requires them managers but instead wants to work
to monitor, to support the sustainable growth of, and to actively
engage with, investee companies. The factors to be considered in
with them to help them develop their
these processes ‘may include, for example, governance, strategy, capacity and expertise.”
performance, capital structure and risk management (including how Hiroichi Yagi (Managing Director, Secom Pension Fund)
the companies address risks arising from social and environmental
matters)’. Finally, institutional investors are expected to report on
how they have implemented the Code. However, the market for responsible investment is immature, with
many asset owners and investment managers at the early stages
The Stewardship Code is a comply-or-explain code. It is up to each in their implementation of responsible investment. There is limited
institutional investor to decide for itself whether it will support evidence that responsible investment considerations are being
and adopt the Stewardship Code. Furthermore, the individual incorporated into, for example, investment management mandates.
elements of the Code can be adopted on a comply-or-explain basis,
allowing signatories to adopt all of the Code or explain why they Most of the major investment managers in Japan are now
choose not to adopt any particular principle. As of 31 May 2015, signatories to the Stewardship Code along with a number of
191 institutional investors, including the GPIF, had adopted the major public funds (including GPIF). These organisations have
Stewardship Code. started to establish stewardship policies and voting guidelines.
Practitioners commented that, even though the Code has only been
The FSA is responsible for monitoring the Stewardship Code, in place since 2014, there are signs that it is having an influence
and for encouraging investment organisations to sign the Code. on investment practice. For example, investors are asking an
Every three months, the FSA produces a list of signatories to the increasing number of questions about ESG issues in their meetings
Code. The FSA also provides links to signatories’ websites where with companies.
additional information on their approach to the Stewardship Code
can be found.
“It is too early to say whether the “Although the term ‘fiduciary duty’ is
Stewardship Code has changed commonly translated by law scholars
Japanese investors’ approach to in Japan as ‘Jyutakusha-Sekinin’ and
engagement. The Code represents a is a widely recognised concept among
significant change in expectations of regulators, investors and companies,
Japanese investors and we will need the term fiduciary duty is not explicitly
five or six years of focused monitoring stated in Japanese laws and regulations.
and implementation before we can tell Japanese law refers to duties of care
whether it has delivered real change in and of loyalty, and these terms broadly
investor practice.” correspond to the term fiduciary duty
Tetsuo Kitagawa (Professor of Finance and Corporate Governance, Graduate
School of International Management, Aoyama Gakuin University, Japan)
as defined in other countries. Because
the term fiduciary duty is not defined
Relatively few corporate pension funds have yet to sign the by Japanese laws, the Stewardship
Stewardship Code. Interviewees pointed to three possible Code uses the term ‘Stewardship
reasons. The first is that corporate pension funds have tended to
lag their public sector counterparts on responsible investment- Responsibility’ to capture the idea that
related issues. The second is that they may be waiting until they
are confident that their sponsor companies comply with the
investors should look to enhance the
requirements of the Corporate Governance Code. The third is that mid- to long-term corporate value and
the pension funds’ parent companies may be reluctant for their
pension funds to engage with companies, because it might affect the sustainable growth of investee
their business relationships with these companies. companies.”
Amane Fujimoto (Corporate Accounting & Disclosure Division, Planning and
Legal Context Coordination Bureau, Financial Services Agency)
The Civil Code of Japan sets out the general duties of persons
that manage the affairs of others. Article 644 of the Civil Code
requires a person who is under a duty to manage another person’s
affairs under an agreement, to perform his or her duties with the to perform their duties in good faith on behalf of the company (or
care required of a ‘good and conscientious manager’. It is widely beneficiaries in the case of pension funds) and to avoid conflicts
accepted by legal practitioners and the courts that the ‘duty of of interest. Interviewees commented that these duties are similar
loyalty’ is a part of the duties required under Article 644. The duty to those required under the ‘prudent person’ rules in other
of loyalty is generally taken as requiring managers (or trustees) jurisdictions.
The requirements of Article 644 also apply to the trustees of Barriers and Challenges
pension funds. These trustees may also be subject to specific Interviewees identified a number of distinct barriers to progress:
duties under pensions or investment law. For example, the GPIF
• Many Japanese investors continue to have concerns about
Act stipulates that the directors of the GPIF must exercise the duty
whether ESG analysis is the same as screening.
of care of a prudent manager and that they must perform their
duties faithfully on behalf of the fund. For corporate pension funds, • Japanese investors are concerned that implementing
the administrators of these funds owe a duty of care and a duty responsible investment may be a breach of their fiduciary
of loyalty under the Civil Code to the employer who established duties.
the pension fund. Although the duties owed to beneficiaries are • There is a lack of robust evidence on the relationship
not specified, it is generally understood that general duties of care between environmental and social issues and investment
and loyalty are also owed to the beneficiaries of the pension fund, performance. Interviewees commented that this contrasts
and that the administrators of these funds must seek to maximise with corporate governance where the relationship between
financial returns for beneficiaries. corporate governance and investment returns has been clearly
established.
Drivers for Change • The relatively limited expertise in Japan in areas such as ESG
Asset owners – specifically public pension funds – have started to integration and active ownership.
pay much more attention to ESG issues since 2014. Interviewees • The relatively limited attention being paid by corporate pension
pointed to a number of factors that have influenced this growth in funds to ESG integration and responsible investment.
interest: • The weaknesses in the disclosures being provided by
• The increased exposure of asset owners to listed equities companies on their social, environmental and governance
as a result of Abenomics encouraging Japanese pension performance. This limits investors’ ability to integrate
funds to move from Japanese government debt to equities. consideration of these issues into their investment practices
This has meant that asset owners have had to develop their and processes. Interviewees commented that the Corporate
understanding of ESG issues as part of developing a long-term Governance Code will encourage better corporate disclosures
picture of the companies in which they are invested. on environmental and social as well as governance issues.
• The introduction of the Stewardship Code and the fact that the This should make it easier to investors to take account of these
Code has been signed by 191 institutional investors is likely to issues in their investment processes.
induce other pension funds to sign the Code.
• International practices and approaches to responsible While it is too early to make a definitive assessment, some
investment. Interviewees pointed to different factors as having interviewees questioned whether the progress that has been seen
an influence on the Japanese market: (a) the growth and profile to date on stewardship (active ownership) will be maintained. They
of the PRI in Japan (both in terms of raising the awareness of commented that the comply-or-explain approach that underpins
responsible investment and in terms of building capacity), (b) the Code is new for Japan and it remains to be seen whether
the Abenomics objective of increasing foreign investment in the Japanese investors will work within the spirit of comply-or-explain
Japanese equities market through strengthening shareholder or whether they will end up defaulting to boilerplate activities
rights and Japanese corporate governance, (c) the desire to and reporting. They acknowledged that the FSA has encouraged
align the Stewardship Code with international best practices, industry organisations to work with these principles, rather than
with the UK Stewardship Code being of particular interest, and simply creating standard templates and checklists, but suggested
(d) the fact that a number of international investment managers that the FSA needs to look closely at the quality of engagement
signed and strongly supported the Stewardship Code. being conducted and the outcomes being achieved.
“Improving the sustainability RECOMMENDATIONS

performance and reporting of Japanese
companies is key to encouraging greater The Financial Services Agency (FSA) should continue to
monitor the implementation of the Japanese Stewardship Code,
domestic investment in listed equities analysing asset owner oversight of their investment managers’
and attracting international investors implementation and analysing the investment and other outcomes
that result from the code.
to the market. Interest – among listed
The Ministry of Health, Labour and Welfare (MHLW) should
companies and among pension funds require public and corporate pension funds to state how they
– in ESG integration and responsible integrate ESG issues into their investment decisions. As part of
these requirements, MHLW should commit to:
investment will grow if companies • review progress annually;
include information on their pension • explain how asset owners integrate ESG issues into their
investment processes;
funds as an integral part of their wider • analyse how these commitments have affected the actions
corporate reporting, and if companies taken and the outcomes achieved (where the outcomes relate
ensure that there is alignment the entities in which they are invested).
between their corporate responsibility
commitments and the responsible publicly commit to responsible investment.
investment commitments of their Investment banks should produce more research on the drivers of
pension funds.” long-term investment value (including ESG factors).
Hiroichi Yagi (Managing Director, Secom Pension Fund)
COUNTRY ANALYSIS:
SOUTH AFRICA
2012 2013 2014 2015*

NOMINAL GDP ($bn)69 397.4 366.2 350.1 323.8
NOMINAL GDP (Rbn)70 3,262 3,534 3,796 4,081
5 ASSET OWNERS GDP PER CAPITA (R/capita)72 62,331 66,488 70,302 74,402
73
75
EMPLOYMENT RATE76 36% 36.1% 35.1% 36.1%
% POPULATION > 6577 5.3% 5.3% 5.5% 5.7%
THE SOUTH AFRICAN PENSION MARKET IN NUMBERS

South Africa, total investment of pension funds (Rbn)78
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
* Estimate 75 OECD: Employment rate represent persons in employment as a percentage of the

70 IMF, World Economic Outlook Database, 2015. 76 Statistics South Africa, P0211 - Quarterly Labour Force Survey (QLFS), 2nd Quarter 2015.
71 IMF, World Economic Outlook Database, 2015. 77 Statistics South Africa, P0302 - Mid-year population estimates, 2015.
72 IMF, World Economic Outlook Database, 2015. 78 OECD, Pension Market in Focus 2014, table 4 and Financial Service Board, 2013 Annual
Report Registrar of Pension Funds, 2015.
74 Statistics South Africa, P0211 - Quarterly Labour Force Survey (QLFS), 2nd Quarter 2015.
South Africa, % AUM by type of pension scheme79
6%
75%
19%
2015
Defined benefit Defined contribution Hybrid
THE SOUTH AFRICAN INVESTMENT MARKET sector tend to be defined benefit schemes. Defined contribution
The JSE All Share Index has a market capitalisation of pension arrangements are typically in the form of a provident
approximately R10 trillion (or approximately US$1 trillion). fund or a pension fund; both are similar, but differ with regard to
tax-exempt contribution limits and the tax treatment of retirement
The South African pension system comprises a non-contributory, benefit options.
means-tested state old age pension, supplemented by various
employer-supported and employment contract-based pension and The Financial Services Board (FSB) is responsible for the licensing,
provident fund arrangements and voluntary retirement savings supervision and enforcement of legislation relating to almost all
funds. While employers are not required to contribute to retirement South African pension funds and their service providers. The largest
funds for the benefit of their employees, employer-based retirement pension fund, the Government Employees Pension Fund, and a few
plans have a long history in South Africa, largely due to significant other funds established under laws other than the Pension Funds
tax incentives. Act, are not subject to oversight by the FSB. Pension fund policy
is implemented by Parliament through national legislation, by the
The statutory private retirement funding framework has been in National Treasury issuing regulations and by the FSB’s registrar of
place since 1958 when the Pension Funds Act became effective, pension funds issuing other forms of subordinate legislation.
although occupational pensions funds had existed in South Africa
for many years before that. Most private sector pension schemes
are defined contribution schemes, whereas those in the public
79 Financial Services Board, Registered (active) funds (excel report), [last access 12 August 2015].
LAW/POLICY CHANGES SINCE FRESHFIELDS • Consider, where appropriate, a collaborative approach to

promote acceptance and implementation of the principles of
(2005) CRISA and other codes and standards applicable to institutional
South Africa was not covered by the original Freshfields report in investors.
2005.
• Recognise the circumstances and relationships that hold the
potential for conflicts of interest and proactively manage these
There have been two significant changes since 2005, namely the
when they occur.
2011 changes to Regulation 28 to the Pension Funds Act, and the
introduction in 2012 of the voluntary Code for Responsible Investing • Be transparent about the content of their policies, how the
in South Africa (CRISA). policies are implemented and how CRISA is applied to enable
stakeholders to make informed assessments.
The overhaul of Regulation 28 was spurred by the global financial
crisis, by the need to modernise regulations to reflect current Signatories are expected to report at least annually, on an apply-or-
investment practice, by the need to reduce systemic risk, and by explain basis, on how they have implemented CRISA.
the need to improve the protection for pensioners. The changes
included a prohibition on the exclusive reliance on credit rating
agencies when making investment decisions and a general PRACTITIONER PERSPECTIVES
emphasis on the importance of comprehensive due diligence. In Current Practice
the specific context of ESG integration, the most notable change
was the requirement for retirement funds to consider ESG factors A recurring theme from the interviews was that there is a general
when making investment decisions. Specifically, Regulation 28(2) lack of transparency in the South African pensions industry.
(c)(ix) states: ‘[B]efore making an investment in and while invested Beyond the large government funds, it is difficult to tell from the
in an asset [the fund and its board must] consider any factor which outside what assets have been invested in, let alone whether
may materially affect the sustainable long-term performance of or how ESG issues have been taken into account in investment
the asset including, but not limited to, those of an environmental, decisions or how asset owners have discharged their ownership (or
social and governance character’. The preamble to Regulation stewardship) responsibilities.
28 explains that: ‘Prudent investing should give appropriate
consideration to any factor which may materially affect the
sustainable long-term performance of a fund’s assets, including “The logic underpinning CRISA is that
factors of an environmental, social and governance character. This
concept applies across all assets and categories of assets and investors should take account of the
should promote the interests of a fund in a stable and transparent
environment’.
impacts of how the company makes
its money on the environment, society
CRISA, which is a voluntary industry code overseen by the
CRISA Committee, came into effect in 2012. CRISA has five main and the economy. Not to do so would
elements, namely that institutional investors should: amount to a failure of the director’s duty
• Incorporate sustainability considerations, including ESG issues,
into their investment process as part of the delivery of superior of care in the changed world of the 21st
risk-adjusted returns to the ultimate beneficiaries. century.”
• Demonstrate acceptance of ownership responsibilities in their Professor Mervyn King
investment arrangements and investment activities.
Interviewees commented that there appears to be increased asset CRISA and, arguably, Regulation 28 expect pension funds to explain
owner awareness of and activity on ESG issues and responsible how they account for ESG issues in their practices and processes.
investment more generally. These are increasingly important parts A number of interviewees commented that investment managers
of due diligence processes, although it is not clear how important are being asked to help their larger asset owner clients to comply
they are in investment manager appointment and reappointment with these requirements through providing data and evidence
decisions. on implementation and on the effectiveness (or influence) of the
actions being taken.
Interviewees also noted that there is a clear difference between

“Pension funds are required to have large funds (which tend to be interested in ESG issues) and smaller
investment policy statements that funds. The smaller funds tend to be resource constrained, lack
expertise and rely heavily on advice from investment consultants
describe their investment policies and and product providers. Training was identified as one part of
objectives as determined by their liability the solution to this problem but interviewees also stressed the
importance of professionalising pension fund boards, of ensuring
profiles and risk appetites, and which that boards are competent to discharge their responsibilities and of
strengthening pension fund governance.
address prescribed matters including
the requirement that they consider Fiduciary Duty
any factors, including environmental, Retirement funds’ duties are based on both the common law as
well as statute, in particular the Pensions Funds Act. The common
social and governance factors, that law duties that apply to retirement funds and to other institutional
investors are generally seen as including acting in good faith and
may materially affect the long-term with loyalty in the best interests of the rights-holder, avoiding
performance of assets before making conflicts of interests and discharging duties with the necessary
prudence, due care and diligence.
decisions to invest in them and while
invested in them. However, most funds Sections 7C and 7D of the Pension Funds Act codify some of
the duties of boards of retirement funds. These include existing
have vague policy statements which common law duties such as acting in good faith, acting with
due care and diligence, and avoiding conflicts of interest. An
provide little, if any, information on amendment to the Pension Funds Act (effective 2014) states that
specific policy decisions by the funds the board of a retirement fund has ‘a fiduciary duty to members
and beneficiaries in respect of accrued benefits or any amount
with which the regulator can enforce accrued to provide a benefit, as well as a fiduciary duty to the
compliance.” fund, to ensure that the fund is financially sound and is responsibly
managed and governed in accordance with the rules and this Act’.
Rosemary Hunter (Deputy Executive Officer: Retirement Funds, Financial Services
Board, South Africa)
While the full implications of this amendment have not been
considered by the courts, in a recent judgment of the Supreme
Court of Appeal in City of Johannesburg & others v the South
The ‘best practice’ funds’ ESG practices of the fund. Subsection (2) then proceeds to give guidance to the
board as to how that object should be pursued. In so far as the
can largely be attributed to the skills section enjoins the trustees to act in the interests of members,
it must therefore be understood in the context of steps taken
and competencies of their trustees who in the direction, control and oversight of the fund. It does not
are key drivers of fund demand for ESG appoint the board as the agent or representative of members
to conduct litigation on their behalf, even against the wishes of
implementation. Often these funds have individual members. As illustrated by the facts of this case, the
trustees who understand the importance interests of all the members of a fund do not always coincide.
Furthermore, there is the obvious potential of a conflict
of ESG and champion ESG strategy from between the interests of the fund, on the one hand, and those
of its members, on the other. Section 7C(2) cannot possibly be
within the fund. understood to preclude the individual members in the event of such
conflict to contest the actions of the board, which would be the
consequence of the interpretation attributed to the section by the
However, in most funds that I am aware court a quo.’
of, trustees do not apply their minds to While the case concerned the question of whether a fund can
ESG. If they do engage with ESG, they be regarded as representative of its members in the context of
litigation, it is probably implicit in this judgment that the fiduciary
tend to outsource it to service providers. duties owed by trustees of a fund to the fund itself – fulfilled by
In our view, fiduciary law dictates that ensuring that it fulfils its principal object (to provide value for
money benefits to its members, current and future) – ranks ahead
trustees should not simply delegate in of the fiduciary duties owed by them to individual current members.
this way, but should instead have robust
processes for setting expectations and “We see CRISA as being entirely
fund policy, monitoring implementation consistent with legal requirements on
and assessing outcomes, in collaboration fiduciary duty.”
with their service providers.” Rosemary Hunter (Deputy Executive Officer: Retirement Funds, Financial Services
Hannine Drake (Senior Associate, Bowman Gilfillan) Board, South Africa)
Regulation 28 is seen as a key development in relation to ESG

African Local Authorities Pension Fund & others [2015] ZASCA 4 integration and responsible investment. Interviewees commented
(9 March 2015), the court said [Emphases added]: ‘[13]… I do not that the regulation puts ESG issues to front of mind as a factor
agree with the notion that s 7C(2) entitles a pension fund or its to be considered in investment decision-making, and removes
board to litigate on behalf of its members. Section 7C deals with any uncertainty around whether retirement funds have such
the object of the board, which is to direct and control the operations obligations. However, Regulation 28 is seen by practitioners as, at
least to some degree, being conceptually separate to the fiduciary
duty requirements of the Pension Funds Act. That is, it is not clear
whether this separately legislated ESG obligation was intended to
“It is important that investors use their
be a development or clarification of fiduciary law, or whether the power as providers of capital to ensure
obligation was intended to be a separate additional duty imposed
by law on retirement funds and their boards.
that companies report in a clear, concise
and understandable manner about
Drivers of Change
While there was a general agreement that there has been
how their business model impacts
significant progress in relation to policy – one interviewee financially, socially and environmentally.
commented that ‘all of the tools and policy measures necessary to
implement responsible investment are in place or available’ – there Investors, be they asset owners or asset
was also a general sense that enforcement is lagging. Interviewees managers, have a duty to their ultimate
noted that South African pension funds are very responsive to the
law, and that, ultimately, the law is likely to be the most effective beneficiaries, to report in a clear, concise
vehicle for change. They acknowledged that the introduction of
new legislation would take time but suggested, at least as an initial
and understandable manner. They are
step, that interpretative guidance on issues such as reporting and accountable and to be accountable
board competence from the FSB would have a similar effect (albeit
acknowledging that such circulars do not have the same standing one has to be understandable, so that
as statutory instruments). the reader can make an informed
Barriers to Progress assessment about long term value
Interviewees pointed to a number of distinct barriers to progress: creation.”
• The lack of regulatory guidance: While Regulation 28 provides Professor Mervyn King
a very helpful in-principle obligation to implement ESG
considerations into investment decision-making processes,
further guidance is required on how this might be implemented • The lack of transparency in the investment industry: Funds
in practice. are generally not required to publish, even if only to their own
• The lack of reporting requirements: There are no requirements members, information on how they address ESG issues in their
on retirement funds to report regularly to the FSB on how they investment practices and processes.
have implemented the requirements of Regulation 28. • Lack of board capacity and expertise: The Pension Funds Act
• The lack of effective oversight of the implementation of CRISA was amended in 2014 to provide that board members of funds
or of the ESG requirements of Regulation 28: The lack of must attain and maintain a certain skill level which is to be
oversight and the lack of consequences for non-compliance prescribed by the FSB. At the time of writing (August 2015), it
has resulted in ESG integration and responsible investment is not clear what emphasis will be placed on ESG issues in the
remaining a low priority for most retirement funds. criteria or guidance to be issued by the FSB.
• Limited regulatory resources and competing regulatory

agendas: The regulators of the South African pensions industry
are faced with a series of major challenges (e.g. the need to
consolidate the industry, the need to protect beneficiaries’
interests), of which ESG integration and responsible investment
is just one.
• A lack of robust evidence on the investment value of ESG
issues.
RECOMMENDATIONS
The Financial Services Board should:

• clarify that compliance with the requirements of Regulation 28,
in particular those relating to ESG issues, should be seen as
an integral part of the fiduciary duties imposed by the Pension
Funds Act;
• clarify that responsible investment includes ESG integration,
engagement, voting and public policy engagement;
• explicitly address ESG-related competence, expertise and skills
in forthcoming guidance on pension fund board education;
• require asset owners to prepare a public, annual report
describing how they have integrated responsible investment
into their investment policy statements, practices and
processes, and their investment manager selection,
appointment and monitoring processes.
The Code for Responsible Investing in South Africa (CRISA)

Committee should strengthen oversight of the code by conducting
more detailed analysis of current practice, analysing the investment
and other outcomes that result from the code.
COUNTRY ANALYSIS:
UNITED STATES
2012 2013 2014 2015*

NOMINAL GDP ($bn)80 16,163 16,768 17,418 18,124
POPULATION (million)81 314.4 316.7 319.0 321.2
227 PRI SIGNATORIES GDP PER CAPITA ($/capita)82 51,409 52,939 54,596 56,421
22 ASSET OWNERS 83
LABOUR FORCE (million)84 154.9 155.6 156 157.1
85
EMPLOYMENT RATE86 67.1% 67.3% 68.1% --
% POPULATION > 6587 13.7% 14.1% 14.5% --
THE US PENSION MARKET IN NUMBERS

United States, total investment of pension funds ($bn)88
16,000
15,000
14,000
13,000
12,000
11,000
10,000
9,000
8,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014**
* Estimate 84 US Bureau of Labor Statistics, Employment status of the civilian non institutional population,
** Preliminary 1944 to date, 2014 and US Bureau of Labor Statistics, Labor Force Statistics from the
Current Population Survey, July 2015.
80 MF, World Economic Outlook Database, 2015.
85 OECD: Employment rate represent persons in employment as a percentage of the
81 IMF, World Economic Outlook Database, 2015. population of working age (15 -64 years).
82 IMF, World Economic Outlook Database, 2015. 86 OECD, Employment rate, 2015.
83 OECD: The total labour force, or currently active population, comprises all persons who fulfil 87 United States Census Bureau, Annual Estimates of the Resident population 2010-2014,
the requirements for inclusion among the employed or the unemployed during a specified 2014.
88 OECD, Pension Market in Focus 2014, table 4 and OECD, Pension Funds in Figures, 2015.
United States, % AUM by type of pension scheme89
58% 58% 58%
42% 42% 42%
2012 2013 2014
THE US INVESTMENT MARKET The key legal regimes applicable to the different forms of
The United States is home to the world’s largest insurance market institutional investor are:
and fund management industry, and to the world’s two largest • Pension funds: Private pension funds are governed under
stock exchanges, the NYSE and NASDAQ. federal law by the Employee Retirement Income Security Act
(1974) (ERISA), which is administered and enforced by the
The American Federal pension system (the Old-Age, Survivors, and US Department of Labor. Public pension funds are governed
Disability Insurance program), which provides minimum income by state laws. Most states have adopted the Uniform Prudent
requirements, is primarily financed through social security taxes Investor Act (1992) (UPIA), which incorporates the modern
paid by employers and employees. prudent investor rule as set out in the Restatement (Third) of
Trusts: Prudent Investor Rule (2006).
Beyond low income workers, defined benefit retirement plans • Mutual funds: Mutual funds are corporations or business
continue to be the dominant form of pension coverage for public trusts administered for the benefit of their shareholders and
sector workers. In contrast, defined contribution plans (which are governed under state laws. In addition to state laws,
include corporate pension plans as well as the traditional 401(k) mutual funds are also subject to the Investment Company Act
plans) are the predominant plans offered to private sector (1940) and, as a consequence, fall under the jurisdiction of the
employees. Securities and Exchange Commission (SEC).
• Insurance companies: Insurance companies are governed
predominantly by state laws, with ERISA being applicable to
89 Tower Watson, Global Pensions Asset study 2015, Global Pensions Asset Study 2014, Global Pensions Asset Study 2013.
the extent that the company is providing services to employee PRACTITIONER PERSPECTIVES
benefit plans.
The Law and Fiduciary Duty
• Non-profit corporations: Non-profit corporations are governed
The Modern Prudent Investor Rule
by state law. The legislatures of 49 states plus Washington DC
The starting point for discussions of fiduciary duty is generally
have adopted the Uniform Prudent Management of Institutional
taken to be the modern prudent investor rule. This has emerged
Funds Act (2006) (UPMIFA), which sets out the prudence
from federal statutes, state statutes implementing uniform laws
standards for the management and investment of non-profit
and state common law, and is generally defined by reference to
corporations. UPMIFA draws the bulk of its text from UPIA.
the American Law Institute’s Restatement (Third) of Trusts: Prudent
• Private trusts: Private trusts are also governed by state law. As Investor Rule (2006). The rule is incorporated into ERISA, UPIA
with pension funds, UPIA articulates the investment standards and UPMIFA. Under the rule, the standard of prudent investment
for the trustees of the private trusts in those states that have includes the duty of loyalty and the duty to diversify investments.
adopted it. The rule requires that the prudence of an investment should be
• Charitable trusts: Charitable trusts are also governed by state determined at the time it was made and not in hindsight. The rule
law. As with non-profit corporations, UPMIFA articulates the also requires that investments are assessed in the context of their
investment standards for the trustees of the charitable trusts in contribution to an investment portfolio as a whole.
those states that have adopted it.
The SEC has broad authority over all aspects of the securities
industry. Its mission is to protect investors, to maintain fair, orderly, “The literature on SRI is robust enough
and efficient markets, and to facilitate capital formation. to say that there is a serious question
around whether or not ESG issues are
LAW/POLICY CHANGES SINCE FRESHFIELDS important to investment performance.
(2005) This suggests that, at a minimum,
There have been a number of significant changes in the law since
the 2005 Freshfields report, notably: due diligence processes must include
• The widespread adoption of UPMIFA, which has largely assessment of the need to take account
harmonised the rules applicable to institutions organised
and operated exclusively for charitable purposes, including of these issues in investment decision-
charitable trusts and non-profit corporations. making.”
• The introduction in 2008 by the Department of Labor of Larry Beeferman (Director, Pensions and Capital Stewardship Project, Labor and
two bulletins under ERISA, one on Economically Targeted Worklife Program, Harvard Law School)
Investments and one on Shareholder Rights.
• The introduction of SEC disclosure requirements on climate
change and on conflict minerals. Interviewees commented that the modern prudent investor rule is
not prescriptive. Rather it gives investment fiduciaries the flexibility
to follow a wide range of diversification strategies, provided that
their investment choices are made with appropriate skill, care and
prudence and always made for the benefit of the plan participants
and beneficiaries.
ERISA (1974) While ERISA formally only applies to private pension funds, it is
ERISA defines the responsibilities of institutional investors entrusted important because many public funds follow its provisions, in
with retirement assets. Chief among these is the obligation particular in relation to the standards of care that are expected of
to always act to protect the interests of plan participants and fiduciaries. It should, however, also be recognised that, depending
beneficiaries. on the details of their charters and of relevant state regulation,
public funds can often invest in areas such as infrastructure, social
ERISA, 29 USC § 1104(a): Prudent man housing and local economic development.
standard of care UPMIFA (2006) and UPIA (1992)
Subject to sections 1103(c) and (d), 1342, and 1344 of this title, a The National Conference of Commissioners on Uniform State Laws
fiduciary shall discharge his duties with respect to a plan solely in drafted UPMIFA to update and replace the Uniform Management
the interest of the participants and beneficiaries and: of Institutional Funds Act (UMIFA). With respect to the standard for
A for the exclusive purpose of: investment fiduciaries, UPMIFA replaces the business judgment rule
(i) providing benefits to participants and their beneficiaries; and applied under UMIFA with the modern prudent investor rule.
(ii) defraying reasonable expenses of administering the plan;
B with the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a
Key Provisions of UPMIFA § 3
like capacity and familiar with such matters would use in the a) Subject to the intent of a donor expressed in a gift instrument,
conduct of an enterprise of a like character and with like aims; an institution, in managing and investing an institutional fund,
C by diversifying the investments of the plan so as to minimize shall consider the charitable purposes of the institution and the
the risk of large losses, unless under the circumstances it is purposes of the institutional fund.
clearly prudent not to do so; and (b) In addition to complying with the duty of loyalty imposed by law
D in accordance with the documents and instruments governing other than this [act], each person responsible for managing and
the plan insofar as such documents and instruments are investing an institutional fund shall manage and invest the fund
consistent with the provisions of this subchapter and in good faith and with the care an ordinarily prudent person in a
subchapter III of this chapter. like position would exercise under similar circumstances.
…
(e) Except as otherwise provided by a gift instrument, the following
rules apply:
“Legislation says that fiduciaries must (1) I n managing and investing an institutional fund, the following
invest for the sole interest of participants factors, if relevant, must be considered:
(A) general economic conditions;
and beneficiaries. This obligation is (B) the possible effect of inflation or deflation;
(C) the expected tax consequences, if any, of investment
generally expressed in financial terms decisions or strategies;
given that the goal of these plans is to (D) the role that each investment or course of action plays
within the overall investment portfolio of the fund;
provide retirement benefits.” (E) the expected total return from income and the
Judith Mares (Deputy Assistant Secretary, Employee Benefits Security appreciation of investments;
Administration, U.S. Department of Labor) (F) other resources of the institution;
(G) the needs of the institution and the fund to make
distributions and to preserve capital; and
(H) an asset’s special relationship or special value, if any, to
the charitable purposes of the institution.
While UPMIFA does not directly address ESG considerations, several

of its provisions are relevant to fiduciary duties, in particular the
“We suspect that, while neither of the
requirements to consider the charitable purposes of the institution Bulletins has had a particular effect
and the purposes of the institutional fund, and to consider,
along with other factors such as the expected total return of the
on those investors who were already
investment, ‘an asset’s special relationship or special value, if any, active in sustainable and responsible
to the charitable purposes of the institution’.
investment, they are discouraging to
That UPMIFA draws so heavily on UPIA, means that the rules
applicable to charitable organisations are now largely the same as
investors contemplating making their
those that apply to non-charitable organisations (including private first commitments to responsible
and public pension funds and mutual funds organised as trusts).
investment.”
Department of Labor Guidance (2008) Meg Voorhes (Director of Research, USSIF)
ERISA created a standard of care requiring fiduciaries to act in the
best interests of beneficiaries/members. In response to questions
about what that meant for ESG issues, the Department of Labor Some investors (e.g. the US Forum for Sustainable and Responsible
issued a number of guidance documents in the mid-1990s that said Investment (USSIF) and its members) have been critical of the
that, all things being equal, investors could consider non-economic bulletins, arguing that: (a) they appear to have altered the ‘exclusive
factors in their decisions, that it was acceptable for trade union purpose rule’ by replacing the duty to impartially serve the interests
funds to make investments that provided social benefits so long of participants and beneficiaries with the duty to protect the
as these had similar financial characteristics to other equivalent ‘economic interests of the plan’, (b) they do not acknowledge the
investments, and that investors should vote their shareholdings in a duty of impartiality to different categories of participants, (c) they
considered manner. actively discourage long-term risk management measures such as
active ownership and voting by focusing on the short-term costs
In 2008, the Department of Labor introduced two new bulletins – of these measures rather than a balanced assessment of the costs
one on Economically Targeted Investments and one on Shareholder and benefits of these measures, and (d) they create a bias against
Rights. The aim of these was to clarify the earlier guidance and to green investments by not giving due account to their financial and
provide additional guidance on the processes that investors should risk mitigation contributions to wider portfolio performance.
follow when deciding how to vote their shareholdings.
In 2014, the Department of Labor started to research investors’
views on the 2008 Bulletins, to better understand what was needed
in terms of regulatory guidance and to determine whether changes
are needed.
Disclosure Requirements
In the US, all publicly listed companies are required to report on
‘material’ information, within the management discussion and
analysis (MD&A) section of their 10-K Forms (or 20-F Forms for
foreign filers). In 2010, the SEC issued Commission Guidance
Regarding Disclosure Related to Climate Change, outlining how
existing regulations apply to the disclosure of risks related to Current Practice

climate change in regulatory filings. In 2012, following a mandate According to the 2014 USSIF Report on sustainable, responsible
in the Dodd-Frank Act, the SEC adopted its final rule on conflict and impact investment trends in the US, $1 in every $6 under
minerals which requires public companies to disclose information professional management in the United States is invested using one
about their sourcing of certain metals from countries that have or more ESG investment strategies (ethical screening, integration
been ravaged by civil war and insurgencies. of ESG issues into investment research and decision-making
processes, shareholder advocacy). The report pointed to significant
increases in the number of asset owners and investment managers
“In our most recent survey of using these ESG strategies and to the increase over the previous
two decades in the volume of assets being managed in this way.
sustainable and responsible investment
in the US, we asked respondents
why they consider ESG issues in their “We are very clear that all our corporate
investment analysis. Of the 91 asset governance engagement and voting
owners that responded, 43% said that activities must be directed towards
their fiduciary duty created a positive protecting the value of investment
obligation to take action.” assets, in line with our fiduciary
Meg Voorhes (Director of Research, US SIF) duties. When we are considering
action (engagement, voting, etc.) on
“One of the big changes since 2008 governance issues, we critically review
has been that the market awareness of the literature and evidence to be sure
the financial materiality of ESG issues that there is a clear link between the
has grown. Increasingly analysts are proposed action and investment value
analysing and measuring the financial creation.”
Michael P. McCauley (Senior Officer, Investment Programs & Governance, Florida
impacts of ESG issues.” State Board of Administration (SBA))
Judith Mares (Deputy Assistant Secretary, Employee Benefits Security

Administration, U.S. Department of Labor)
In relation to engagement, there are no formal legal obligations
on investors to be active owners. Voting rights are, however,
recognised as fund assets, and funds must report on how they vote.
Endowments, foundations and public plans tend to be more active
on engagement than corporate plans.
Drivers for Action However, there was also a recognition that change is likely to be
Interviewees were optimistic that the number of investors using relatively slow and piecemeal. In part this is due to the barriers to
ESG investment strategies, in particular the integration of ESG progress (see below). However, interviewees cautioned that even if
issues into investment research and decision-making processes all of these barriers were addressed, the traditional interpretations
and shareholder advocacy, will increase over time. They pointed of fiduciary duty (in particular, the emphasis on short-term
to a number of distinct drivers: the growing market awareness of performance, the definition of beneficiary interests as being
the financial relevance of ESG issues, market understanding of the exclusively defined in financial terms and the view that wider social
differences between ethical screening and ESG integration, better or environmental issues should be not considered in investment
disclosures from corporations on their ESG performance, and wider decision-making) still represent major obstacles to change.
societal trends such as customer interest in issues such as climate
change and human rights. Barriers to Change
• The lack of regulatory guidance or court decisions on how
“Courts, generally, do not want to responsible investment aligns with fiduciary duty. Interviewees
pointed to the importance of having clarity on (a) timeframes
second guess bad decisions. Rather, (or the definition of ‘long-term’), (b) the specific activities
that should form part of investors’ approach to responsible
they are interested in whether the investment, and (c) the issues that should be considered in
decisions were based on sensible investment research and decision-making processes.
• The advice being provided by legal advisers and investment
decision-making processes. So, for consultants. Interviewees commented that advisers and
example, a decision to exclude coal (e.g. consultants continue to argue for very narrow interpretations of
fiduciary duty, and to stress that delivering short-term, financial
because of concern that climate change performance is the key expectation of fiduciaries. This, in turn,
policy may create stranded assets) acts as a brake on asset owners’ willingness to adopt long-term
investment.
based on credible assumptions and a
robust decision-making process may be “US lawyers tend to see fiduciary duty in
considered acceptable. If an asset owner very narrow terms. They often think that
does make such a decision, it must ‘the lines are brighter than they actually
have the discipline to set out its beliefs, are’, i.e. that there must be an exclusive
be prepared to review the outcomes focus on financial returns, and that they
achieved and have the willingness to must be agnostic on ethical issues.”
change if the data or evidence changes.” Brian Golob (Global General Counsel and Global Chief Compliance Officer, Russell
Investment Group)
Brian Golob (Global General Counsel and Global Chief Compliance Officer, Russell
Investment Group)
“One of the obstacles to the Department

• C ommonly held views about responsible investment. Among
those identified by interviewees were the perceptions (or of Labor taking a more prescriptive
misperceptions) that responsible investing is prohibited approach is that there is no standardised
under ERISA guidance, that taking account of ESG issues in
investment practice goes against the fiduciary duty concepts reporting on ESG issues. This makes it
of prudence and loyalty, that a focus on ESG issues negatively
affects investment performance, and that responsible
difficult to draw blanket conclusions on
investment is the same as negative screening. This is the financial implications of ESG issues.”
particularly applicable to the private pension market. Judith Mares (Deputy Assistant Secretary, Employee Benefits Security
• The lack of knowledge on ESG issues among investment Administration, U.S. Department of Labor)
consultants and legal advisers. Interviewees commented that,
because many investment consultants and legal advisers are
not familiar with responsible investment, they tend to argue that RECOMMENDATIONS
responsible investment may violate ERISA’s exclusive purpose
rule (often using the Department of Labor’s 2008 Bulletins to
support this argument).
The Department of Labor should:
• The lack of robust evidence on the relationship between
• clarify that:
environmental and social issues and investment performance.
Interviewees did point to corporate governance as an issue • fiduciary responsibility requires a long-term, risk-adjusted
where there is good academic research on the investment approach to management of pension assets so as to
relevance of these issues, and where there has been legal deliver sustainable retirement benefits to participants and
clarification (e.g. in the Enron case) of governance expectations. beneficiaries in an impartial manner;
• The weaknesses and inconsistencies in corporate reporting • asset owners should pay attention to long-term factors
on environmental and social issues. This makes it difficult for (including ESG issues) in their decision-making, and in the
investors to take account of these issues in their investment decision-making of their agents;
processes. • asset owners are expected to proactively engage with the
• The lack of consensus among beneficiaries, or in wider society, companies and other entities in which they are invested;
on the ESG standards expected of companies. • and clarify that these actions are consistent with asset
• The energy dependence of the US economy. This is particularly owners’ fiduciary duties.
important in states where coal, oil and mining are economically • reissue its 2008 bulletins on Economically Targeted Investments
important, where there is a perception that responsible and on Shareholder Rights, and:
investment may conflict with the state’s core economic • clarify that asset owners’ duty is to impartially serve the
interests. interests of participants and beneficiaries;
• clarify that the assessment of the costs and benefits of risk
management measures such as active ownership should
explicitly consider the long-term benefits of such measures;
• c larify that green investments can make important financial

and risk mitigation contributions to investment portfolios.
• require asset owners to say how they integrate ESG issues into
their investment decisions. As part of these requirements, the
Department of Labor should commit to:
• review progress annually;
• explain how asset owners integrate ESG issues into their
investment processes;
• analyse how these commitments have affected the actions
taken and the outcomes achieved (where the outcomes
relate to both investment performance and to the ESG
performance of the entities in which they are invested).
The New York Stock Exchange (NYSE) and Nasdaq, given

their scale and influence, should strengthen their ESG disclosure
requirements for companies, in accordance with their public
commitment to the Sustainable Stock Exchanges (SSE) initiative
to promote long-term sustainable investment and improved ESG
disclosure and performance among companies listed on their
exchange.
US Momentum Around the Role of ESG Factors

in Long-Term Investment
In Winter 2015, the PRI will publish a report that highlights the
increasing actions by US pension funds to address ESG factors in
their investments. The document also debunks misconceptions
relating to ERISA and clarifies that collaborative shareholder
engagement is not Acting in Concert.
APPENDICES
INTERVIEWEES duty affect their investment approach, and about how prevailing
From March to June 2015 the project team interviewed over 50 interpretations of fiduciary duty affect the wider investment
stakeholders – investors, policymakers, lawyers and regulators – to market’s approach to ESG integration and active ownership. When
understand how fiduciary duty affects investment practice in each we interviewed investment managers and service providers,
of the eight countries covered by the studies. For each country, we asked them about how their clients’ fiduciary duties and
the aim was to develop a clear understanding of current practice, commitments to responsible investment were implemented in
challenges and trends. To ensure consistency between countries, practice.
we used a structured interview process to ensure that we covered
the same subject areas in each interview. The regulators we interviewed were asked about the law in their
country as it relates to fiduciary duty, about how they interpret and
We asked the asset owner interviewees about their approach to implement the law, and about how the law might be changed to
investment and, specifically, about how they take account of ESG encourage asset owners to take greater account of ESG issues in
issues in their investment processes and in their active ownership their investment processes. We asked similar questions of legal
and engagement activities. We also asked them about how formal advisers but with a greater focus on the advice that they offer
legal requirements and informal expectations around fiduciary to their asset owner clients and on how these asset owners are
responding to advice given.
Alison Schneider Senior Manager, Responsible Investing Alberta Management Investment Corporation Canada
(AIMCo)
Amane Fujimoto Corporate Accounting & Disclosure Division, Financial Services Agency Japan
Planning and Coordination Bureau
Andreas Hallermeier Portfolio Manager Bayerische Versorgungskammer Germany
Anton Pillay CEO Coronation Fund Managers South Africa
Bethan Livesey Policy Officer ShareAction UK
Bozena Jankowska Global Co-Head of ESG Allianz Global Investors Germany
Brian Golob Global General Counsel & CCO Russell Investments US
Bruno Couri Secretário Rio Bravo Investimentos Brazil
Carolyn Morris Senior Manager Policy Development Australian Prudential Regulation Authority Australia
Chris Hodge Executive Director, Strategy, Financial Financial Reporting Council UK
Reporting Council
Chris Davies CEO Telstra Super Australia
Craig Roodt Head of Investment Risk Australian Prudential Regulation Authority Australia
Dan Chornous CIO RBC Global Asset Management Canada
Daniel Ingram Head of Responsible Investment BT Pension Scheme UK
Daniel Simard CEO Bâtirente Canada
Danielle Press CEO Equip Super Australia

David Styles Head of Corporate Governance and Financial Reporting Council UK
Stewardship
Ed Waitzer Partner Stikeman Elliott LLP Canada
Fernando Duarte Folle Especialista em Previdência Complementar Superintendência Nacional de Previdência Brazil
CGPE/DISUP Complementar - PREVIC
Fumito Kawanishi Chairman Secom Pension Fund Japan
George Iguchi Head of Corporate Governance, General Nissay Asset Management Corporation Japan
Manager of Equity Investment Department
Hannine Drake Senior Associate Bowman Gilfillan South Africa
Hiroichi Yagi Managing Director Secom Pension Fund Japan
James Andrus Portfolio Manager CalPERS US
Jonathan Grabel CIO Public Employees Retirement Association of US
New Mexico
José Carlos Doherty CEO ANBIMA Brazil
Judith Mares Deputy Assistant Secretary US Department of Labor US
Judy Cotte V.P. & Head, Corporate Governance & RBC Global Asset Management Canada
Responsible Investment
Juliane Hilf Partner Freshfields Bruckhaus Deringer Germany
Karen Lockridge Pension Actuary Mercer Canada
Katharine Preston Manager, Responsible Investing, OPSEU Pension Investment Association of Canada Canada
Pension Trust, and Acting Chair of the PIAC
Corporate Governance Committee
Kazuhiro Okuma Director, Environment and Economy Division Ministry of Environment Japan
Kirshni Totaram Head of Institutional Business Coronation Fund Managers South Africa
Larry Beeferman Director, Pensions and Capital Stewardship Harvard Law School US
Project, Labor and Worklife Program
Luciana Burr Partner Rayes & Fagundes Advogados Associados Brazil
Lucy Tusa Principal Mercer UK
Marcel Theroux Partner Mercer Canada
Marcel Barros Executive Director PREVI Brazil
Marcelo Seraphim Pension Fund Specialist Superintendência Nacional de Previdência Brazil
Complementar - PREVIC
Marguerite Mills Director, General Counsel Genesis Investment Management UK
Màrio Fleck CEO Rio Bravo Investimentos Brazil
Mark Chaloner Assistant Director – Investments West Midlands Pension Fund UK

Meg Voorhes Director of Research and Operations US SIF US
Mervyn E. King Chair of the King Committee on Corporate Mervyn E King SC South Africa
Governance
Michael McCauley Senior Officer, Investment Programs & Florida State Board of Admin US
Governance
Normand Brouillet Board Member Bâtirente Canada
Paul Watchman Honorary Professor School of Law, University of Glasgow UK
Peet Maritz Principal Officer Transnet Pension Fund South Africa
Rosemary Hunter Deputy Executive Officer, Retirement Funds Financial Services Board South Africa
Sarah Barker Special Counsel Minter Ellison Lawyers Australia
Simon Taylor Senior Manager, Legal, Policy and Legislation Australian Prudential Regulation Authority Australia
Steve Waygood Chief Responsible Investment Officer Aviva Investors UK
Steve Berexa Senior Portfolio Manager and Global Head of Allianz Global Investors US
Research
Tetsuo Kitagawa Professor of Finance and Corporate Aoyama Gakuin University Japan
Governance, Graduate School of International
Management,
Thomas Neumann Head of Investment Supervision, Federal BaFin (Bundesanstalt für Germany
Financial Supervisory Authority Finanzdienstleistungsaufsicht)
GLOBAL PEER REVIEWERS panel of global peer reviewers, representing a mix of practitioners
On 9 July 2015, the findings were presented in a series of public and stakeholders in each of the eight countries. A list of the
webinars. Over 180 PRI signatories, UNEPFI members and other individuals who provided comment on the draft report is provided
stakeholders participated in these webinars. below.
From 14 to 29 July 2015, the project team coordinated a global

peer review process, with the draft report being sent to an external
Justin Atkinson Alliance Trust

José Carlos H. Doherty ANBIMA
Claudia Kruse APG
Hannine Drake Bowman Gilfillan
James Andrus CalPERS
Carlos Joly Cambridge Institute for Sustainability Leadership
Natalie Smith Client Earth
Bettina Kretschmer European Commission DG ENV
Amane Fujimoto Financial Services Agency (Japan)
Rosemary Hunter Financial Services Board (South Africa)
Daniela Saltzman, Shalini Rao Generation Foundation
Rob Lake Rob Lake Advisors Ltd.
Bruce Duguid Hermes Investment Management
Erik Breen, George Dallas International Corporate Governance Network (ICGN)
Tom Powdrill International Transport Workers' Federation
Rebecca O'Brien Radford Loomis, Sayles & Company
Randy Bauslaugh McCarthy Tétrault
Sarah Barker Minter Ellison
Anne-Maree O' Connor New Zealand Super Fund
Marcelo Seraphim PREVIC
Anne Wittman SHARE
Bethan Livesey ShareAction
Pierre Habbard Trade Union Advisory Committee to the OECD
Axel Hesse SD-M GmbH
Meg Voorhes US SIF
Aditi Maheshwari, Alison Harwood, Fiona Elisabeth Stewart World Bank Group / IFC
FURTHER READING United Nations Environment Programme Finance Initiative [UNEP

Readers wishing to understand the exact legal situation regarding FI] (2005), A Legal Framework for the Integration of Environmental,
fiduciary duty in a specific country should review the legal texts and Social and Governance Issues into Institutional Investment (UNEP FI,
case law relevant to that country, and may need to speak to legal Nairobi). [commonly referred to as the Freshfields Report]
practitioners to get a complete and robust assessment. For readers http://www.unepfi.org/fileadmin/documents/freshfields_legal_
interested in reading more about the broad themes and issues resp_20051123.pdf
raised in this report, the following are useful references:
United Nations Environment Programme Finance Initiative [UNEP
FairPensions (2011), Protecting our Best Interests: Rediscovering FI] (2009), Fiduciary Responsibility: Legal and Practical Aspects
Fiduciary Obligation (FairPensions, London). of Integrating Environmental, Social and Governance Issues into
http://www.fairpensions.org.uk/sites/default/files/uploaded_files/ Institutional Investment (UNEP FI, Nairobi).
fidduty/FPProtectingOurBestInterests.pdf http://www.unepfi.org/fileadmin/documents/fiduciaryII.pdf
Generation Foundation (2015), Allocating Capital for Long-Term United Nations Environment Programme Inquiry: Design of a
Returns: The Strengthened Case for Sustainable Capitalism Sustainable Financial System (2015), Aligning the Financial System
(Generation Foundation, London). with Sustainable Development: Pathways to Scale (UNEP, Geneva).
https://www.genfound.org/media/pdf-genfound-wp2015-final.pdf http://apps.unep.org/publications/index.php?option=com_
pub&task=download&file=011401_en
Hawley, J., Hoepner, A., Johnson, K., Sandberg, J. and Waitzer, E.
(eds.) (2014), Cambridge Handbook of Institutional Investment and
Fiduciary Duty (Cambridge University Press, Cambridge).
Johnson, K. (2014), Introduction to Institutional Investor Fiduciary

Duties (IISD, Winnipeg).
http://www.reinhartlaw.com/Documents/art140402%20RIIS.pdf
Kay, J. (2012), The Kay Review of UK Equity Markets and Long-

term Decision Making. Final Report – July 2012 (Department for
Business, Innovation and Skills, London).
http://www.bis.gov.uk/assets/biscore/business-law/docs/k/12-917-
kay-review-of-equity-markets-final-report.pdf
Law Commission (2014), Fiduciary Duties of Investment

Intermediaries (HMSO, London).
http://www.lawcom.gov.uk/wp-content/uploads/2015/03/lc350_
fiduciary_duties.pdf
DISCLAIMERS
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THE PRI’S SIX PRINCIPLES FOR RESPONSIBLE INVESTMENT
1
We will incorporate ESG issues into investment
analysis and decision-making processes.
2 We will be active owners and incorporate ESG

issues into our ownership policies and practices.
3 We will seek appropriate disclosure on ESG

issues by the entities in which we invest.
4 We will promote acceptance and implementation

of the Principles within the investment industry.
5 We will work together to enhance our

effectiveness in implementing the Principles.
6 We will each report on our activities and progress

towards implementing the Principles.
About the United Nations Global Compact About the Principles for Responsible Investment Initiative
The United Nations Global Compact is a call to companies The PRI works with its international network of signatories to put
everywhere to voluntarily align their operations and strategies with the six Principles for Responsible Investment into practice. Its goals
ten universally accepted principles in the areas of human rights, are to understand the investment implications of environmental,
labour, environment and anti-corruption, and to take action in social and governance issues and to support signatories in
support of UN goals and issues. The UN Global Compact is a integrating these issues into investment and ownership decisions.
leadership platform for the development, implementation and
disclosure of responsible corporate policies and practices. The six Principles were developed by investors and are supported
Launched in 2000, it is largest corporate sustainability initiative by the UN. They have more than 1,400 signatories from over
in the world, with over 8,000 companies and 4,000 non-business 50 countries representing US$59 trillion of assets. They are
signatories based in 160 countries. voluntary and aspirational, offering a menu of possible actions
for incorporating ESG issues into investment practices. In
For more information, see www.unglobalcompact.org implementing the Principles, signatories contribute to developing a
more sustainable global financial system.
About UNEP Finance Initiative For more information, see www.unpri.org

The United Nations Environment Programme Finance Initiative
(UNEP FI) is a unique global partnership between the United Nations
Environment Programme (UNEP) and the global financial sector About UNEP Inquiry
founded in 1992. UNEP FI works closely with over 200 financial The Inquiry into the Design of a Sustainable Financial System has
institutions who have signed the UNEP FI Statements been initiated by the United Nations Environment Programme to
as well as a range of partner organizations to develop and promote advance policy options to deliver a step change in the financial
linkages between sustainability and financial performance. Through system’s effectiveness in mobilising capital towards a green and
peer-to-peer networks, research and training, UNEP FI carries out inclusive economy - in other words, sustainable development.
its mission to identify, promote, and realize the adoption of best Established in early 2014, it will publish its final report in the
environmental and sustainability practice at all levels of financial second half of 2015.
institution operations.
For more information, see www.unep.org/inquiry
For more information, see www.unepfi.org

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FIDUCIARY DUTY

CORE PROJECT TEAM PROJECT STEERING COMMITTEE

For any further questions email: [email protected] or [email protected].

RESEARCH APPROACH DEFINITIONS

AL GORE AND DAVID BLOOD

This report is a landmark piece in the global dialogue on the

In particular, the Global roadmap for ESG integration in this report

The importance of sustainability to business and investing is

Brazilian investors are increasingly focusing the fiduciary duty

As asset owners, we recognise that we have responsibilities

We recognize that our fiduciary obligations are not confined to the

This view is informed both by our own research as well as a body

To overcome these challenges, this report

Integrating ESG issues into investment research

LEGAL CONTEXT • Duty to act conscientiously in the interests of beneficiaries –

COMMON LAW VS CIVIL LAW JURISDICTIONS

However, there has been a significant increase in ESG disclosure

In addition, the economic and market environment in which the law

“The concept of fiduciary duty is organic,

ANALYSING AND ASSESSING ESG RISKS: THE STAKEHOLDERS

Some interviewees offered challenges to these assumptions:

Some interviewees said that not engaging with beneficiaries is the

New fiduciaries may emerge from defined contribution

In many countries, the move from defined benefit to defined

INTERMEDIARIES – LEGAL ADVISERS,

POLICYMAKERS AND REGULATORS

GERMANY: • Strengthen the stewardship code by:

SOUTH AFRICA: • Reissue its 2008 bulletins on Economically Targeted

2012 2013 2014 2015*

THE AUSTRALIAN PENSION MARKET IN NUMBERS

* Estimate 6 Australian Bureau of Statistics, 6202.0 - Labour Force, Australia, 2015.

Australia, % AUM by type of pension scheme11

81% 81% 85%

19% 19% 16%

2012 2013 2014

Defined benefit Defined contribution

PRACTITIONER PERSPECTIVES “It is the process of information

2012 2013 2014 2015*

THE BRAZILIAN PENSION MARKET IN NUMBERS

* Estimate 17 WB Data, Labor force total, 2015.

Brazil, % AUM by type of pension scheme22

16% 16% 17%

74% 75% 73%

2012 2013 2014

Defined benefit Defined contribution Variable contribution

The Brazilian pension system comprises three pay-as-you-go

Interviewees commented that the lack of attention paid in

There is growing pressure for RECOMMENDATIONS

2012 2013 2014 2015*

THE CANADIAN PENSION MARKET IN NUMBERS

* Estimate 28 Statistics Canada, Labour force characteristics, 2015.

24 IMF, World Economic Outlook, 2015. 30 OECD, Employment rate, 2015.

Canada, % AUM by type of pension scheme33

89% 87% 85%

2012 2013 2014

Defined benefit Defined contribution Hybrid

Fiduciary Duty Interviewees stressed the importance of fiduciary duty as an

Interviewees commented that while the emphasis on financial

“The ideas of intergenerational equity (in Barriers to Progress