About the authors: Max M Schenzenbach He is the Siegel Family Law Professor at Northwestern Pritzker School of Law. Robert H. willcove He is Austin Wakeman Scott Professor of Law and John L. Gray Professor of Law at Harvard Law School.
The current discourse on ESG is yielding two irresistible outcomes. The first is that fiduciary duty is prohibited Investing in ESG. The second is that fiduciary duty dictates investment in ESG. Wait what? To say the least, the situation is baffling.
The blame lies partly with the regulators. The Department of Labor under President Trump has all said investing in ESG Violate a fiduciary duty before retracting his final verdict. President Biden’s Department of Labor said of this fiduciary duty Requires investment in ESGalthough its final base is still pending.
Some confusion is semantic as well. “Environmental and Social Investment (ESG)” refers to two very different concepts. The first is that the use of ESG factors can improve risk-adjusted returns. The second is that investing in ESG can save the world by starving “bad” companies for capital, and providing side benefits to third parties. This second understanding of ESG is a renaming of the older concept of “socially responsible investing”.
Confusion and regulatory leaflets are not good for financial markets or investors. Much is at stake, especially the management Nearly $40 trillion in retirement savings. A more disciplined way of thinking about ESG issues is to recognize that different contexts have different legal and policy considerations.
Let’s take a simple example. I assume
He refused to invest in a shale oil field on the grounds that although it was potentially profitable, that field would be particularly polluted. How should we evaluate this decision through
Managers, and separately, the ensuing decisions by mutual fund and pension agent to buy or sell Chevron shares?
Whether a company can put ESG (or other) targets before earnings is a matter of state corporate law. Generally, directors are exposed to legal risks if they publicly subject earnings. But if board members can point to a relationship between company policy and shareholder value, such as managing litigation or reputational risk, their decision will likely be made firmly. The calculations of the policy behind this preferential treatment is that the courts will do a poor job of second-guessing the decisions of ordinary firms, and that capital markets will better discipline managers. But efficient capital markets require honest disclosure of material financial information. Thus, the main question for the Securities and Exchange Commission in making its current ESG rules is how important ESG information is to capital market participants.
Now suppose Chevron decides, with proper disclosure, to invest in the shale oil field. Can ESG No-Shale-Oil Sell Chevron Shares? yes. In fact, if the fund promised not to hold shale oil companies, the federal securities law required Selling Chevron Shares. Here, public policy is the politics of truth in describing it, not dictating goals. Individuals who invest their money are free to do so however and for whatever reason they wish. The role of the law is to implement the promises made regarding the nature of those investments. Regulators can clarify by requiring ESG funds to disclose their targets, in their own name or elsewhere. One of them could be called an ‘ESG – Return to Risk’ fund as opposed to a ‘Social Benefit/Impact’ fund.
Which brings us to the $40 trillion question. The pension fund can Asset Allocation ConsultantInvesting other people’s money, buying, selling, or voting Chevron shares on an ESG basis with side benefits, such as reduced pollution, that are different from risk and return? Under the Federal Employee Retirement Income Insurance Act, the answer is a clear, backed “no.” Supreme Court precedent and long lasting organizational guidance.
The policy of captive retired investors with tax-supported accounts is paternalistic toward one goal: the worker’s financial well-being upon retirement. Once the worker receives a distribution, this money is theirs to spend as the worker desires. But until then, ERISA requires the agent managing a worker’s retirement savings to consider only expected risks and returns. Thus, a mutual fund that uses ESG factors to assess financial risk and return could be a permissible investment for an ERISA credit agency, but a fund that uses ESG factors to pay collateral interest is not.
Can a pensioner pursue ESG side benefits while making an excuse to risk and return? These opportunities are limited. Unlike corporate law, the fiduciary investor’s duty of care has teeth. a credit investor It must have a documented and reasonable analysis to justify its decisions, and it must monitor and update its investment program wisely. A fiduciary agent cannot continue indefinitely with a persistently underperforming ESG (or any other) fund.
ERISA bans investing for social impact, but gives Investing in ESG The risk and return are as wide as any other profitable investment strategy. Within this path, the market rather than the government must sort out the winners and losers. Government pressure for or against investment in the environment, society, and governance will create regulatory uncertainty with a freeze on various strategies that might stop working or that might be beneficial. Fiduciary law has eschewed this approach, assimilating financial innovation subject to general fiduciary standards.
Guest comments like this were written by authors outside of Barron’s Newsroom and MarketWatch. Reflect the point of view and opinions of the authors. Send feedback suggestions and other feedback to email@example.com.