This report begins with the premise that the goal most associated with institutional investment management is earning a financial return. However, earning money is not the only goal we have for our lives or for our world. It exists alongside broader goals concerning the quality of the social and natural environment, or its sustainability. Both are valued goals.

The report looks at eleven jurisdictions and assesses whether their laws permit institutional investors, specifically pension funds, mutual funds and insurers and their investment managers, to pursue sustainability outcomes. It looks at whether laws need to change in order to achieve sustainability-related goals and provides options for policymakers to enable investing for sustainability impact (IFSI).

IFSI is defined as any investment approach where investors intentionally seek to influence what investees do in assessable ways that address sustainability challenges. This approach differs from other sustainable finance approaches such as environment, social and governance (ESG) integration which applies ESG criteria to understand which companies to invest in or avoid.

The purpose of IFSI can either be to secure or enhance financial returns or to pursue sustainability outcomes as the primary investment goal. Impact investing is just one type of IFSI.

Investors engaging in IFSI are concerned with two types of sustainability impact:

• the impact on social and environmental sustainability of business enterprises, and the impact of policymakers and other parties on the operating environment for enterprises and investors; and

• the influence that the investors themselves have on the sustainability impact of enterprises, policymakers and other parties.

The report distinguishes between two kinds of IFSI:

• Instrumental IFSI  – where achieving the relevant sustainability impact goal is ‘instrumental’ in realising the investor’s financial return goals. For example, an investor may conclude that its financial return goals may not be realised unless a particular overarching sustainability outcome can be achieved and the targeted sustainability impact goal can help with that.

• Ultimate ends IFSI – where achieving the relevant sustainability impact goal, and the associated overarching sustainability outcome, is a distinct goal. It pursued alongside the investor’s financial return goals, not just as a means to achieve them.

The goals of ultimate ends IFSI can be broader than instrumental IFSI. That does not mean that they are inconsistent with investors’ financial goals, nor that they should take priority over them. It simply means that an investor’s decisions are partly motivated by seeking to achieve a sustainability impact goal for reasons other than achieving the investor’s financial goals.

Generally, legal rules are more likely to permit IFSI where this supports an investor’s financial goals (ie instrumental IFSI) than they are to permit ultimate ends IFSI.

The report lists some policy options available to facilitate IFSI. Broadly, they fall under two categories:

• Changing investors’ legal duties and discretions and how they are understood; and

• Changing the circumstances in which investors discharge duties and exercise discretions.

Legal rules that apply to different investor types vary considerably between jurisdictions. The report makes detailed findings about legal frameworks in each jurisdiction.

1. IFSI essentially addresses the same issue as current attention to corporate purpose, but from the point of view of investors: what is the purpose of economic activity and how does it relate to the wellbeing of people and planet?
2. IFSI involves setting sustainability impact goals in which an investor intentionally tries to create assessable behaviour changes among business enterprises or policymakers aligned with achieving overarching sustainability outcomes.
3. Collaboration is a key theme. Collaboration with other investors is likely both to reduce the costs and enhance the prospects of a successful sustainability outcome and therefore of achieving the goals of IFSI investors.
4. The concept of IFSI is not confined to any section of the investment market or any asset class (so would cover holdings of debt instruments, funds and private equity interests as well as publicly traded shares).
5. The legal rules that apply to different investor types vary considerably between jurisdictions. Their content, application and interpretation reflect the culture of the jurisdiction concerned. Even within a jurisdiction, there are different rules for different categories of investor. investors need to consider their position on a case-by-case basis.
6. The primary purpose of Asset Owners’ investment activity is generally regarded as generating a financial return for beneficiaries within acceptable risk parameters. Thus, applicable legal duties have generally been interpreted to require financial investment objectives to be prioritised, and in some cases a financial return is the only goal that an Asset Owner should pursue.
7. If an Asset Owner or investment manager concludes that one or more sustainability factors poses a material risk to its ability to achieve its financial investment objectives, it will generally have a legal obligation to consider what it can do to mitigate that risk.
8. There is usually a legal duty to IFSI where an investor is managing the assets of an investment arrangement that has specific sustainability impact objectives, for example, a mutual fund established with the aim of bringing about a particular type of sustainability impact. These sorts of investment arrangement are permissible in most relevant jurisdictions in some form.
9. Options for legal reform include:
   * changing the scope of investors’ duties and discretions or the legal frameworks within which investors must operate;
   * build ‘infrastructure’ for IFSI investment approaches;
   * influence aspects of investment markets which may affect the likelihood of investors adopting IFSI investment approaches; and
   * enhance transparency and strengthen market discipline in relation to IFSI investment approaches.