Fiduciary duty considerations compatible with ESG criteria

Fiduciary duty considerations compatible with ESG criteria

The article of Robert Kropp at the SocialFunds Portal refers to this late development in investment policies’ legal criteria untying the hands of operators applying ESG principles. The author notices that in 2008, an interpretive bulletin of the Department of Labor's Employee Retirement Investment Security Act (ERISA) strongly discouraged economically targeted investments (ETIs) by pension plan fiduciaries, stating instead that financial returns are the paramount fiduciary duty. This is changed and at a conference held during the 2014 Investor Summit on Climate Risk, New York State Comptroller Thomas DiNapoli said, “Dealing with the issue of climate risk is totally consistent with fiduciary responsibility.” After all, in 2005, the Freshfields report asserted that the consideration of environmental, social, and corporate governance (ESG) criteria falls within the bounds of fiduciary duty, and a follow-up report published in 2009 argued that consultants may well have a legal duty to proactively raise ESG issues with their clients. 

I was in attendance at that press conference, and despite the assertions of the Freshfields reports wondered whether DiNapoli's statement would pass legal muster in the US. In 2008, an interpretive bulletin of the Department of Labor's Employee Retirement Investment Security Act (ERISA) strongly discouraged economically targeted investments (ETIs) by pension plan fiduciaries, stating instead that financial returns are the paramount fiduciary duty. 

According to Peter Kinder, co-founder of KLD Research and Analytics, an ESG investment research firm, ETIs include “applying ESG-type criteria in investment decisions.” 

It si worth noting that despite the ERISA directive, the practice of sustainable investment has grown substantially in the years since then. The 2014 Trends Report of US SIF: The Forum for Sustainable and Responsible Investment estimated sustainable investment assets to be $6.57 trillion, a 76% increase since 2012 and 18% of total assets under management in the US. Nevertheless, the degree to which pension plan fiduciaries may have been discouraged from considering ESG factors is difficult to quantify. 

Last week, the Labor Department finally took steps to rectify the shortsighted and quite likely politically motivated guidance of the 2008 bulletin, by repealing it and replacing it with a new interpretive bulletin. The 2008 directive, the Department now states, “unduly discouraged fiduciaries from considering ETIs and ESG factors.” 

"Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand," said Secretary of Labor Thomas Perez. "We have heard from stakeholders that a 2008 department interpretation has unduly discouraged plan fiduciaries from considering economically targeted investments. Changes in the financial markets since that time, particularly improved metrics and tools allowing for better analyses of investments, make this the right time to clarify our position." 

According to the new bulletin, “An economically targeted investment broadly refers to any investment that is selected, in part, for its collateral benefits, apart from the investment return to the employee benefit plan investor.” With the new directive, the position of the Labor Department is the following: “Environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment...Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.” 

In response to the publication in the Federal Register of the new bulletin, Lisa Woll, Chief Executive Officer of US SIF, stated, “Today’s action enables investment professionals to exercise their judgment and expertise in the service of beneficiaries without concerns about possible conflicts with ERISA. It clearly signals that ERISA-governed plans, and by extension, those plans influenced by ERISA, may integrate critical environmental, social and governance issues into their investment decisions.” 

And Matthew Patsky, CEO of the sustainable investment firm Trillium Asset Management, said, “We know that integrating Environmental, Social, and Governance factors into the investment process can help identify companies best positioned to deliver strong long-term performance...the gold standard for fiduciary duties in the United States—the standard that impacts Trillium and our peers—now recognizes consideration of ESG as a valid part of the investment discipline.”