As interest in the integration of environmental, social and governance (ESG) factors into investment processes has grown, fiduciaries have been caught between competing viewpoints. One side posits that, strictly defined, fiduciary duty entails “a legal duty to act solely in another party's interests,”1 which has traditionally meant a sole focus on maximizing financial returns for that party. Hence, a focus on any factors besides the bottom line—such as ESG—could be seen as a violation of that responsibility unless that focus was deemed to potentially increase returns. Advocates of ESG-based investing make precisely that point—ESG risk factors could potentially be material to the bottom line, and positive ESG scores may contribute to long-term sustainable value. Accordingly, ESG risk factors could be considered an appropriate input by a prudent plan fiduciary.
In a recent development, the US Labor Department issued guidance on October 22, 2015 for retirement plans covered by the Employee Retirement Income Security Act of1974 (ERISA). The guidance states that, although collateral goals of ESG investing may be considered only as “tie-breakers,” when choosing between otherwise equal investment alternatives, “environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices,” thus providing fiduciaries with comfort in incorporating ESG considerations in their investment decisions.2
