Responsible investments: from industry good practice to law

in Industry Insights, 16.11.2016

Hitherto, firms have been encouraged by investors, by regulators, or by governments to adhere to recognised principles for responsible investment such as the United Nations’ backed Principles for Responsible Investments (UNPRI). But encouragement is hardening into mandate. Firms can expect to see a steady move from industry good practice to rules, and from general regulatory guidelines to law.

Previously a subject left to industry good practice and investor demands, socially responsible investment (SRI) is beginning to move up the regulatory agenda. As a result of the new legally-binding treaty on climate action agreed on in Paris nearly a year ago, policy makers are turning their attention to how they can encourage or require investors and investment managers to adopt strategies that will support countries in meeting their new commitments.

French law has already been modified to require more specific disclosure in the management report of French entities, including investment funds, on the resources put in place to contribute to environmental improvements. The investment manager must consider the assets in which it invests its clients and their impact on the environment. The new rules are applicable from the end of this year.

ESMA is considering how the provision in the new Key Information Document relating to an investment product’s environmental objective might ensure proper transparency. And MEPs across the political spectrum are seeking the industry’s views about what more needs to be done at the legislative level.

Initial thoughts emerging include the need for clarity on:

  • what is and what is not SRI
  • convergence of accounting and reporting requirements
  • standardisation of the identification and calculation of investment risk

Concerns have also been expressed that regulatory and tax initiatives need to be better aligned, both with each other and with a long-term investment view.

Meanwhile, investing institutions are increasingly incorporating green investments into their portfolios. These might be new investments or existing investments that are brought into compliance with SRI requirements.

Since Luxembourg is the first domicile for responsible investing funds in Europe in terms of assets under management,[1] investment managers setting up their funds in the Grand Duchy have a key role to play in helping to encourage investing institutions in the right direction via their communications and the investment strategies they offer. They must start asking themselves:

  1. How well and how regularly are we engaging with our institutional clients on SRI issues?
  2. Are we explaining SRI-compliant products clearly and effectively to retail investors?
  3. How embedded in our investment offerings and processes is SRI investing?
  4. Do we need to review our current investment and operational processes?
  5. Can we bring existing products and strategies into compliance with recognised SRI principles?
  6. Are we engaging with regulators and legislators as they consider new rules?

Now is the time for investment managers to engage in the European and global debates, to have a regular dialogue with their clients on SRI issues, and to evolve their investment strategies and product options for a world in which SRI becomes the norm—not a nice-to-have extra.


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[1] European Responsible Investing Fund Survey 2015, KPMG


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