Fiduciary Duty and ESG Issues

Mark Bateman - November 9, 2015

You have a fiduciary duty to your clients.  Period.

But is it counter to your fiduciary duty to consider environmental, social, or governance factors?  A frequent refrain say, “Yes, it is counter to your duty to consider anything except financial return!”

In new interpretive guidance, the Department of Labor (DOL) soundly rejects that argument with regard to pension investments.  The new guidance, issued effective October 26, 2015, actually rescinded guidance issued in early 2008 as the Bush Administration wound down, restoring the essence of guidance from 1994.

At its core, the DOL rescinded the 2008 guidance because it believed it “unduly discouraged fiduciaries from considering … ESG factors.”  The new 2015 guidance is careful to reiterate that under ERISA (the Employee Retirement Income Security Act of 1974), economic issues may not be subordinated to other considerations within the same risk/return profiles, but may be considered none the less.

In its press release, the Department of Labor concluded:  “The guidance … acknowledges that environmental, social, and governance factors may have a direct relationship to the economic and financial value of an investment. When they do, these factors are more than just tiebreakers, but rather are proper components of the fiduciary’s analysis of the economic and financial merits of competing investment choices.”

The investment industry that exists around ESG investing is very pleased with this ruling and participated with Department of Labor Secretary Thomas Perez in the press conference announcing the new guidance.

The DOL guidance certainly does not say that you must consider ESG issues to meet your fiduciary duty, though there are many in the ESG industry who believe this is the case, but it makes clear that a manager is not breaking his or her legal responsibility by doing so.

The UN Principles for Responsible Investment (UN PRI) published a paper “Fiduciary Duty in the 21st Century”  in September, takes the extra step.  From it’s executive summary:  “Failing to consider long-term investment value drivers, which include environmental, social and governance issues, in investment practice is a failure of fiduciary duty.”

While the DOL guidance only specifically applies to pensions under the ERISA laws, it is clear that to restrict fiduciaries to a narrow approach of determining economic benefit is increasingly a more difficult argument to make.