How asset owners deal with the law and sustainable finance

Several asset owners found themselves facing the law when it comes to matters concerning environmental, social, and corporate governance (ESG). In an article by IPE, there had been many legal interventions regarding sustainable finance in the past 18 months.

This trend had been playing a large part in the growing unease of investors.

Asset managers vs the law and ESG

Recently, the Securities and Exchange Commission had subpoenaed several asset managers because of their ESG marketing, specifically going after conventional funds that had rebranded with new labels related to sustainability, as reported by Financial Times.

Last May, Attorneys General from 20 US States had written to members of the Net Zero Insurance Alliance regarding their concerns about the possibility of their commitments breaching competition rules. This has led to several groups revoking their membership.

In the UK, the Universities Superannuation Scheme (USS) had gone against its own directors regarding investments in fossil fuels. Two beneficiaries of its pension scheme had filed a derivative claim that said that the investment in oil and gas was financially irresponsible.

However, the case was rejected last year and failed an appeal in the previous month as it was determined that there was no evidence that suggested that the USS used its powers improperly and that the argument attempted to go against the investment decisions of the directors even if did not have any “ground upon which to do so.”

In Australia and New Zealand, the courts had told activists to make the Parliament change the laws regarding the climate instead of trying to stretch the interpretation of existing laws.

Using the law to move towards the accomplishment of ESG goals

Despite many asset owners finding themselves contending with the law when it comes to ESG, there are still those that are at the other end of the spectrum. They are actively utilizing the law in order to ensure the fruition of their fund’s ESG goals.

One such example is the Sjunde AP-fonden (AP7), a Swedish pension fund.

As of date, AP7 currently has 18 class action lawsuits. The pension fund has been targeting portfolio companies that are believed to have been harming their share price value through breaching ESG norms.

AP7 had settled a case in 2020 against Alphabet, the owner of Google. The pension fund accused it with mishandling sexual harassment allegations. Part of the settlement made Alphabet promise to spend $310 million on initiatives concerning internal diversity and inclusivity.

Johan Floren, AP7’s head of sustainability, said that all of its cases revolved around governance.

“It’s fairly common that the company has done something that affects its valuation and it hasn’t been open with the market about it, and that’s not allowed under the law.” said Floren.

“When a company does something that isn’t acceptable, they should pay the price for it.”