Paul Williams, Jonathan Mort Inc.

The Legal Parameters of ESG: Do’s and don’ts for trustees

The legal parameters of ESG: do’s and don’ts for trustees

Introduction•Why focus on the law?•What does the law require?•What are the parameters?•How to work within the legal parameters?•Conclusion: key messages

The legal parameters of ESG: do’s and don’ts for trustees

Why focus on the law?•Forms parameters of investment decision-making process•Perspective: refer back to those parameters

The legal parameters of ESG: do’s and don’ts for trustees

Legal requirements (1) – the common law•Take account of, and weigh up, all relevant factors in pursuance of the purpose of the fund•Cowan v Scargill: “when the purpose of the trust is to provide financial benefits…the best interests of beneficiaries are normally their best financial interests”•UNEP-FI 2005 report (Freshfields opinion): “integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and arguably required....”•ESG considerations relevant factors insofar as they affect performance

The legal parameters of ESG: do’s and don’ts for trustees

Legal requirements (2) – Regulation 28“A fund and its board must at all times apply the following principles….

(ix)Before making an investment in and while invested in an asset consider any factor which may materially affect the sustainable long term performance of the asset including, but not limited to, those of an

environmental, social and governance character”

•Arguably goes no further than the common law•Significant, as removes (at least some) uncertainty

The legal parameters of ESG: do’s and don’ts for trustees

Legal parameters•Trustees must not ignore ESG factors•In theory permissible not to take ESG factors into account if have good reasons for it•Primary goal must be performance/financial interests•If not detrimental to financial interests, can arguably take ESG considerations into account for non-financial reasons

The legal parameters of ESG: do’s and don’ts for trustees

Working within the parameters•One size does not fit all •Cost benefit analysis•You cannot be an ostrich about this•Pick the low hanging fruit

The legal parameters of ESG: do’s and don’ts for trustees

Some practical steps•Use your consultant’s expertise•Devise a policy and include in your IPS•Engage with your investment managers & custodians

• Extent to which they include ESG considerations in analysis

• What strategies do they adopt?

• PRI (Principles of Responsible) signatory?

• Voting policy and engagement with management – and do the two correspond?

•Include in tenders for new IMs and investment consultants•Legally binding obligation in IMA•Structure fees to incentivise long term performance•Training•Sign up to PRI – benefits of membership

The legal parameters of ESG: do’s and don’ts for trustees

Conclusions – key messages•Ignoring ESG a breach of trustee duty•Financial interests still paramount•One size does not fit all

The legal parameters of ESG: do’s and don’ts for trustees

Thank you for listening

Any questions?

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