Sustainability integration in investment management in the UK

There is little doubt that conventional investment management takes into account material sustainability and ESG (environmental, governance, and social) matters. The more pertinent legal risk for investment managers is whether they would incur legal risk for failing to carry out certain ESG-related actions, such as engagement or divestment. As none of these actions are prescribed in the Stewardship Code to which investment managers may be voluntary signatories, challenges against asset owners (eg McGaughey & Davies v USS) would unlikely succeed as courts are arguably deferential to how investment management is carried out. The Financial Conduct Authority’s (FCA) requirement for most fund managers to produce Taskforce for Climate-related Financial Disclosures entity-level and product-level reports arguably supports the assumption that climate risk is material to investment management. Specifically labelled sustainability funds, which may be opted into under new FCA regulation, entail specific disclosure and conduct duties to maintain the integrity of the labels, and seem robust in combating greenwashing. Such regulation is not, however, about steering allocation or necessarily mandating the achievement of non-financial objectives directed by public policy.