London -- Only days ahead of the historic summit to adopt the Sustainable Development Goals (SDGs), a new UN study calls on regulators to implement proactive policies that build institutional investment frameworks, institutions and culture with sustainability at their core.
'Financial Reform, Institutional Investors and Sustainable Development: A review of current policy initiatives and proposals for further progress' was produced by the United Nations Environment Programme Inquiry into the Design of a Sustainable Financial System (UNEP Inquiry) and the California Public Employees' Retirement System (CalPERS).
Henry Jones, Chair of Investment Committee, CalPERS, said: 'At CalPERS we have no doubt that our focus on sustainability is entirely consistent with our fiduciary duty - indeed it is an essential part of it.'
'Where doubts on this score remain, they must be dispelled,' he added. 'And we need institutions that have the knowledge, the skills and the ways of working that are required to embed sustainability in their investments - to manage the risks it brings, and to capitalize upon the opportunities if offers. We hope every country will reflect on how it can best address these challenges.'
With an estimated annual financing gap of up to US $7 trillion a year in infrastructure investments alone, the global financial system, worth more than US $300 trillion, has a potential to transform the international economic landscape to better serve the needs of humanity.
Nick Robins, Co-Director, UNEP Inquiry, said: 'A package of measures is needed to deliver the full sustainability potential of institutional investors. Disclosure is important, but without effective governance frameworks and incentives, this will not drive sufficient change.'
The report advocates for systemic and dynamic policy reform that better aligns institutional investors with policy goals for sustainable development. It shows the evolution in policy intervention, from focusing on disclosure obligations and statements on investors' core legal duties to a 'second generation' approach, addressing the strong synergy between sustainability and other policy objectives.
These new policy instruments include improving prudential regulation to protect retirement incomes and ensure financial stability, regenerating the real economy, and strengthening public trust in the financial system. Making the connections among policy objectives explicit presents an opportunity to maximize benefits in multiple areas.
Seven critical policy objectives that hold the strongest potential for positive change are explored in the report together with fourteen policy tools to get us there.
Policy tools include:
- Governments giving public sector pension funds, sovereign wealth funds and other state investment institutions formal sustainability obligations. Such is the case of the Government Pension Fund Global in Norway.
- Governments incorporating sustainability into the mandate of prudential regulators, such as the Dutch regulator DNB mission statement including 'safeguard[ing] financial stability and thus contribut[ing] to sustainable prosperity in the Netherlands.'
- Requirements to disclose and report on policies on sustainability issues. For example, France requires investment institutions to disclose their carbon footprint.
The report charts a pathway to a sustainable investment chain, articulating that these areas will deliver four main outcomes: resilient and efficient portfolios, capital mobilization towards the low-carbon transition, increased economic welfare with more long-term investment and restored public trust in investors and the financial system.
CalPERS and UNEP Inquiry seek to provide new perspectives and proposals on the relationship between institutional investors and sustainable development in the context of a more sustainable financial system. The report's author, Rob Lake, is an independent responsible investment advisor and expert, working with asset owners. The report is supported by the Principles for Responsible Investment (PRI) and the UNEP Finance Initiative (UNEP FI).
About The UNEP Inquiry
The Inquiry into the Design of a Sustainable Financial System has been initiated by the United Nations Environment Programme to advance policy options to improve the financial system's effectiveness in mobilizing capital towards a green and inclusive economy - in other words, sustainable development. Established in January 2014, it will publish its final report in October 2015.
For more than eight decades, CalPERS has built retirement and health security for State, school, and public agency members who invest their lifework in public service. CalPERS is a long-term investor and committed to sustainable investments, as outlined in its investment beliefs. CalPERS' total fund market value currently stands at approximately $287 billion. Its pension fund serves more than 1.7 million members in the CalPERS retirement system and administers benefits for more than 1.4 million members and their families in its health program, making it the largest defined-benefit public pension in the US.
About the author
Rob Lake is an independent responsible investment advisor, working mainly with asset owners. He was previously Director of Responsible Investment at the UN-supported Principles for Responsible Investment, Head of Sustainability and Governance at APG, and Head of Corporate Engagement at Henderson Global Investors. He has worked as an advisor with investors in Australia, Canada, Iceland, the Netherlands, Singapore, Sweden, the UK and the US. He is an advisor to the OECD and the Investment Leaders Group at the University of Cambridge, and a former member of the Strategy Council to the Norwegian Government Pension Fund Global.