A Legal Framework for Impact Investing?

Policymakers should explore rule changes and flexibilities to allow investors to allocate to positive impact strategies, according to a new report.

Multinational law firm Freshfields Bruckhaus Deringer’s report is the first comprehensive analysis of the legal requirements of impact investing, according to the United Nations Principles for Responsible Investment (PRI).

Investors’ ability to invest for impact depends on local and regional legal frameworks and how these are applied, the Freshfields report said, meaning policymakers “wishing to facilitate” impact investing should consider several changes.

Options put forward in the report included changing “legal duties and discretions and how they are understood”, such as “allowing the pursuit of sustainability goals as long as financial return goals are prioritised”.

Freshfields also suggested “changing the circumstances in which rules are applied” by constructing an “enabling environment” for impact investing through improving data standards, promoting in-depth research, and “strengthening market discipline” by labelling products accurately and introducing strong governance rules.

The report defines “investing for sustainability impact”, or IFSI, as “any investment approach where investors intentionally seek, through the activities they finance or otherwise, to influence what investee enterprises and third parties do in assessable ways that address sustainability challenges”.

As investors increasingly focus on how their activities impact society, the need for clarity on this was “much needed”, according to a press release from PRI.

“Freshfields [has] identified a diverse spectrum of actions that investors and policymakers could take to better facilitate investing for sustainable impact, and these are based on an extensive analysis of the unique legal and regulatory conditions they face in their respective jurisdictions,” said Fiona Reynolds, CEO of PRI.

Inger Andersen, executive director of the UNEP, added: “This revelatory report offers a new path forward, identifying the current law and modification options to support a transition from predominantly environmental, social and governance-integration to wide-spread investment for sustainability impact.”

The report was commissioned by the PRI, The Generation Foundation, and the United Nations Environment Programme Finance Initiative.

Legal jurisdictions covered included the US, Canada, Australia, Brazil, China, the EU, France, Japan, the Netherlands, South Africa, and the UK.