Ethical Performance
inside intelligence for responsible business


lawyers find no legal basis for objections to SRI

January 2006

A team of more than 25 lawyers from around the world has concluded that the prevailing belief among mainstream investors that it is unlawful to take environmental and social issues into account when investing assets is ‘mistaken’ – and that, on the contrary, failure to do so ‘will often be a breach of legal duties’.

The conclusion comes in a 150-page report from the world’s third-largest law firm, Freshfields Bruckhaus Deringer, that looks at the legal responsibilities of institutional investors in nine capital markets – Australia, Canada, France, Germany, Italy, Japan, Spain, the UK and the US.

The team found that laws in Australia, France, Germany, and the UK required ‘investment decision-makers’ for private and public pension funds, insurance company reserves, and mutual funds to disclose the extent to which they take environmental, social and governance considerations into account, and such legislation was pending in Italy. In the other countries there was no impediment to investors doing so.

Paul Watchman, a Freshfields partner and one of the five lead authors, said the findings showed that the legal basis of objections to investors considering SRI issues was ‘illusory’. In all the territories examined by the firm ‘the law clearly permits and, in certain circumstances, requires that this be done’. Watchman added that this has ‘far reaching implications for the institutional investment community worldwide’ as it demolishes the argument that investors cannot take SRI issues into account.

The United Nations Environment Programme’s Finance Initiative, which commissioned the study, believes this legal opinion will add weight to its forthcoming ‘Principles for Responsible Investment’ which are being devised with 20 investment institutions, among them BNP Paribas (France), Citigroup (US), Morley (UK) and Nikko (Japan). They had hoped to agree the principles by autumn 2005, but are now expected to do so in March or April this year. The voluntary principles, the draft of which has not been made public, will suggest how institutional investors might best incorporate environmental and social matters into investment decision-making.

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