The fiduciary duties of directors should include a responsibility to manage long-term sustainability risks, according to the interim report from the European Union’s High Level Expert Group on Sustainable Finance.
The report also concludes that quarterly reporting is an obstacle to sustainability, while investors have a right to information. The report said the development of integrated reporting and the work of the International Integrated Reporting Council (IIRC) is an “important development” in tackling the conflict.
“The responsibility of directors and investors to manage long-term sustainability risks should be enshrined in their relevant duties, whether it is through fiduciary duty in common law or its equivalent in other legal systems. Updates should make clear that managing ESG risks is integral to fulfilling these duties,” the report said.
It added: “When this happens, it is clearly an obstacle to promoting sustainable, long-term investments. At the same time, investors’ demand for information is legitimate to oversee and steer the allocation of scarce resources.
“An important development in that regard is the establishment of the International Integrated Reporting Council, which seek to promote integration of financial and non-financial issues in reports and accounts as a way of identifying and communicating the ability of an organisation to create value over time.”
The IIRC’s chief executive Richard Howitt called the report an “important recognition” of the role of integrated reporting.
“Whilst welcoming the recognition of the work of the IIRC in the integration of financial and non-financial information, we recognize that this is only an interim report and accept our responsibility to work with partners across Europe to bring about the shift to long-termism and integrated thinking.
“The concept of integrated reporting is built on the premise that financial stability and sustainable development go hand-in-hand, and the EU High-Level Group has signalled a decisive step towards this for the European Union itself.”
The high level group made a series of recommendations:
- Develop a classification system for sustainable assets
- Establish a European standard and label for green bonds and other sustainable assets
- Clarify that fiduciary duty encompasses sustainability
- Strengthen ESG reporting requirements
- Introduce a “sustainability test” for EU financial legislation
- Create “Sustainable Infrastructure Europe” to channel finance into sustainable projects
- Enhance the role of the European supervisory agencies in assessing ESG-related risks
- Unlock investments in energy efficiency through relevant accounting rules
The Expert Group is expected to produce a final report in December this year.
