13 Jul 2024 - by A4ID

Guest post: The law: a barrier or a tool for the SDGs?

Edward Millett questions whether the law can help financial institutions make the transition to environmentally responsible investment.

Edward Millett, LPC Student and upcoming trainee solicitor, questions whether the law can help financial institutions make the transition to environmentally responsible investment.

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The law: a barrier or a tool for the SDGs?

Can the law help financial institutions make the transition to environmentally responsible investment?


Sustainable Development Goal 13 makes the call to the global community to ‘combat climate change and its impacts.’ In the rarefied world of investment management, the notion of responsible investment that takes account of climate risk seems to be gaining currency.

In the UK, the environmental divestment movement are calling for major institutions – including universities, faith organisations and even the MP’s £600M pension fund ­– to divest from fossil fuel companies on the basis of this climate risk.  Theirs has been an important voice in making the case for energy transition from a social perspective, raising the profile of issues such as fracking and air pollution. However, research shows – and activists admit – that the economic impact of their programme is distinctly secondary to its social impact. [1] Real change will not come until investors in the fossil fuel industry decide for themselves.

Reports abound of activist investors clamouring for change. In 2017, research firm Wood Mackenzie warned of the growing risk to the core business of oil and gas firms unless significant investment in renewables is made, with the larger firms needing to spend more than $350B by 2035 to maintain a 12% market share. [2] At ExxonMobil and institutional investor BlackRock, investor pressure is forcing companies to reconsider the future of their core businesses, while BP returns to a strategy it gave up during the recession years: buying up small renewable companies. [3] Not everyone is convinced, however: Shell’s shareholders voted overwhelmingly in 2017 to reject a resolution to set and publish annual targets on emission reduction. [4]

This change in approach to responsible investment matters. The risks posed by a changing climate are twofold, and go far beyond the laudable but nebulous notions of investment for ethical reasons.

First, ‘physical risk’ caused by extreme weather events, climate-driven population movement and other primary factors poses a threat to supply chains, workers and agriculture, leading to increased insurance claims and the risk of debt default. Second, ‘transition risk’ from technological advancement, changing governmental policy and shifts in consumer demand could threaten balance sheet impairments, impact on asset valuation, and revenues. [5] Researchers talk of new carbon-based assets as ‘stranded assets’: money spent on prospecting now may never be recouped if those assets cannot be realised as fuel. [6]

In the UK, the legal frameworks that could assist this transition have been, historically, woefully lacking. Ethical investment has come a little way from the 1980s, when Arthur Scargill – inflammatory head of the National Union of Miners – was defeated in an attempt to diversify the investment decisions of the miners’ pension fund away from purely financial considerations. Over time, ethically-minded investment management became cautiously allowed – provided overall financial performance would in no way be harmed.

It was not until 2014 that the Law Commission for England and Wales made the gentle suggestion that Environmental, Social and Governance (ESG) factors ought to be considered by investment managers and trustees. [7] The report distinguished financial factors – those directly impacting a fund’s bottom line – and non-financial factors, which represent the ethical stance of the trust beneficiaries. Financial factors must be taken into account; non-financial factors may be. Therefore, provided fossil fuel investment is in the former category it should be a genuine concern for fund managers, at risk of falling foul of fiduciary duties and the statutory scheme of the Trustee Act 2000.

The report’s recommendations were supported by the Pensions Regulator but are, as yet, unimplemented in English law. However, change may be on the horizon for responsible investment in Europe. An EU Directive regulating the investment decisions of Institutions for Occupational Retirement Provision passed in late 2016 (known as ‘IORP II’), states clearly that ‘where ESG factors are considered in investment decisions’, the assessment must include ‘an assessment of new or emerging risks, including risks related to climate change, use of resources and the environment, social risks and risks related to the depreciation of assets due to regulatory change.’ [8] IORP II is tabled for implementation in 2019, and confirms concerns about the financial risk posed by continued investment into oil and gas.

Though Brexit may scupper hopes of IORP II shaking up responsible investment in the UK, help may be at hand from a different source. If the Financial Conduct Authority’s recommendations to the Treasury to bring British investment managers into their ‘regulatory perimeter’ are heeded, managers would be laden with more arduous duties to act in beneficiaries’ best interests and less scope for excluding liability.

Similarly, the tireless work of divestment campaigners may finally be filtering through to legislators. The Parliamentary Contributory Pension Fund (PCPF) recently published its 2017 Annual Report and it mentions climate risk for the first time [9], while the Commons Environmental Audit Committee this month warned institutional investors that climate change poses a major risk to Pension Funds. [10]

The Pensions Regulator, the FCA, and major institutional investors are hardly the first who spring to mind at the mention of ‘environmental action’, but perhaps all that is about to change…


Edward Millett is an LPC student and incoming trainee solicitor at Clifford Chance London. His interests include ethical investment, land rights and the renewables sector.

*The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of A4ID




[1] ‘Stranded assets and the fossil fuel divestment campaign: what does divestment mean for the valuation of fossil fuel assets?’ Report by Smith School of Enterprise and the Environment, Oxford University.


[2] https://www.theguardian.com/environment/2017/jun/12/oil-giants-need-to-invest-heavily-in-renewables-by-2035-analysis-finds

[3] https://www.wired.com/2017/05/boring-old-pension-funds-might-curb-global-warming/

[4] https://www.reuters.com/article/us-shell-agm/shell-shareholders-reject-emissions-target-proposal-idUSKBN18J1N1

[5] ‘Risky Business’: Climate change and professional liability risks for pensions investment consultants. Report by Client Earth.


[6] ‘Trillion Dollar Transformation: Fiduciary Duty, Divestment, and Fossil Fuels in an Era of Climate Risk’. Report by Center for International Environmental Law.


[7] ‘‘Is it always about the money?’ Pension trustees’ duties when setting an investment strategy’. Report by Law Commission.


[8] EU Directive on the activities and supervision of institutions for occupational retirement provision (IORP) (2016/2341), Art.28(2)(h).


[9] Parliamentary Contributory Pension Fund Annual Review 2017


[10] Commons Environmental Audit Committee: Green Finance http://www.parliament.uk/business/committees/committees-a-z/commons-select/environmental-audit-committee/news-parliament-2017/green–finance-chairs-cooments-17-19/