The Principles for Responsible Investment ("PRI") recently published a report, Addressing ESG Factors Under ERISA, that sets forth two legal perspectives on the ability of fiduciaries to consider environmental, social, and governance ("ESG") factors in their investment decision-making.
The report builds upon an interpretative bulletin released by the U.S. Department of Labor in October 2015. The bulletin, previously discussed here, sought to clarify that ESG issues "may have a direct relationship to the economic value of [a] plan's investments" and therefore may be "proper components of [a] fiduciary's primary analysis of the economic merits of competing investment choices." The DOL bulletin has been referred to as a "huge game changer for responsible investment in the United States."
The first legal perspective in the PRI report, provided by the law firm Morgan Lewis, found that plan fiduciaries may appropriately consider ESG factors as part of an overall investment process designed to offer prudent consideration to the risk and return characteristics of specific investments. Concerns about fiduciaries' duty of loyalty should not arise unless they consider "potentially sacrificing investment performance to advance social goals."
The second legal perspective, provided by the Groom Law Group, similarly found that "plan fiduciaries may take ESG criteria into consideration with every investment decision, since they are legitimate investment elements within risk and return." If a plan fiduciary finds that ESG criteria arguably lead to risk reduction or increased returns, the fiduciary must still find that the overall investment is prudent.
Ultimately, the PRI report is intended to facilitate the consideration of ESG factors "across the U.S. financial services sector" and to address "misconceptions around ESG and fiduciary duty." As investors face more pressure to incorporate ESG considerations into their decision-making, the DOL bulletin and the legal perspectives provided in the PRI report should provide a degree of comfort to those who may have formerly had misgivings.
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