Many investment consultants are failing to consider environmental, social and governance issues in their investment advice, warns a report by the Principles for Responsible Investment.
The organization said in its report, "Working towards a sustainable financial system: investment consultant services review," that despite consultants advising on the investment practices of trillions of dollars across the globe, many are not taking ESG issues into account.
Based on interviews with 22 investment consulting firms and industry experts primarily in the U.K., U.S. and Australia, as well as other data sources, the PRI found three barriers to taking ESG into consideration among consultants: market structure, industry practice, and policy and regulation.
While the PRI's central conclusion is that investment consultants "are unlikely to take action on ESG issues without stronger incentives to do so from their asset owner clients," it suggests a number of actions that could be taken to overcome these hurdles. Regarding market structure, the PRI suggested small to medium and resource-constrained asset owners pool and clearly express their ESG service demands. It also said the PRI could explore the development of a quality standard for the consultant market with professional bodies or regulators.
On industry practice barriers, the PRI said it could support asset owners in asking their consultants to publish ESG investment beliefs, including explanations of how these commitments align with fiduciary duties and how they manage conflicts of interest.
On the policy and regulation side, potential remedies include clarifying that asset owners and consultants should consider ESG issues in investment processes.
"It is time to reconsider what investment advice should look like as a part of a sustainable financial system that serves beneficiaries and individual investors," said Nathan Fabian, PRI director of policy and research, in a statement accompanying the report. "ESG must be a core part of investment advice because ESG is a core part of investors' fiduciary duties. We see market structure, market practice and regulatory reasons why ESG is not currently a core part of investment advice. Addressing these reasons is a necessary step for a more sustainable financial system."
The PRI will host workshops in multiple countries to gain feedback and is also looking for written feedback. It will then identify, prioritize and sequence projects that it believes will help to integrate ESG issues as a standard part of investment consultants' services.