Global investor interest in sustainable and responsible investment continues to accelerate at a rapid pace. The Global Sustainable Investment Alliance (GSIA) estimates $23 trillion in global assets are managed under responsible investment strategies, representing a 25% increase since 2014. Responsible investment strategies consider environmental, social and governance (ESG) factors in portfolio selection criteria and management with the belief that better corporate ESG profiles result in fewer disasters and corporate scandals. Investment policies that integrate ESG criteria tend to express investor values specific to weapons, carbon emissions, fossil fuel reserves, labor conditions, human rights, corporate governance, executive compensation and other concerns aimed at solving social or environmental problems. Corporate engagement and shareholder activism are also strategies investors are increasingly using to influence corporate behavior driven by ESG guidelines.
With over 20 years of actively protecting and promoting the rights of institutional investors and public entities, Grant & Eisenhofer (G&E) has built its legacy in corporate governance with an unwavering commitment to responsible investment. We continue to build on our history with a new initiative designed to address the increasing dialogue on ESG criteria within the institutional investment community. The mission of the Grant & Eisenhofer ESG Institute is to provide thought leadership on legal issues related to ESG considerations and socially responsible investment. Key members of the global investment and ESG communities will participate on an Oversight Board to provide strategic insight and development for the Institute. The Oversight Board members have been thoughtfully selected to provide a diverse range of perspectives, experience and backgrounds that will collectively direct the creation and future evolvement of the ESG Institute. Members bring global experience from asset managers, public pension funds and nonprofits.
Some of the legal issues the ESG Institute will focus on include:
The ESG Institute will meet periodically with high quality events both in the US and Europe to provide continuity and a forum for engagement to connect like-minded participants and organizations. The Institute will seek regular feedback from participants and the Oversight Board. Our objective is to continuously address the legal issues that decision makers and stakeholders in the investment community are grappling with in implementing sustainability considerations and responsible investment criteria.
* Source: 2016 Global Sustainable Investment Review released by the Global Sustainable Investment Alliance
Selected ESG related articles and recent matters:
EU Agrees on New Requirements Regarding Sustainable Investments and Sustainability Risk Disclosures
On March 7, 2019, the European Parliament and European Union countries agreed on new rules on the disclosure and transparency requirements for sustainable investments made by asset managers. The rules require money managers, insurance companies, pension funds and investment advisers to integrate environmental, social and governance (“ESG”) factors into their portfolios, to report ESG risks and opportunities as part of their fiduciary duty, and to include a transparency framework so end-investors can better understand how asset managers take sustainability factors into account.
The European Commission first proposed the agreement in May 2018, as part of the EU’s sustainable development agenda and the carbon neutrality agenda. The agreement introduces consistent transparency requirements across various financial services sectors designed to eliminate “greenwashing,” which occurs when investment firms make unsubstantiated or misleading claims about the sustainability focus of products they offer investors, and to reduce information asymmetries on sustainability issues between financial advisors and investors.
In announcing the agreement, the Commission noted that the availability of information is crucial to integrating risks related to the impact of ESG events on the value of investments, such as to assets located in flood-prone areas, as well as the disclosure of adverse impact on ESG matters, such as in assets that pollute water or devastate bio-diversity, to ensure the sustainability of investments.
The Commission did not announce when the rules will go into effect.
Investment Professionals Increasingly Focused on ESG Factors
At the close of 2018, the marketing firm Edelman released its second annual Special Report: Institutional Investors, a supplement to The Edelman Trust Barometer, which measures global trust in business, government, media and NGOs. The report surveyed more than 500 chief investment officers, portfolio managers and buy-side analysts across five countries to capture insights and observe trends from some of the world’s most powerful institutional investors. Responses showed that in addition to financial metrics, investors increasingly incorporate ESG (Environmental, Social, and Governance) factors into their strategies.
Collectively, the firms whose representatives responded to the survey manage more than $4.5 trillion in assets, using various investment styles. Yet ninety-three percent of respondents stated that their firms believe long-term value hinges on both financial performance and ESG features. Most went so far as to say their firms would consider investing with a lower rate of return if the investment included sustainable or impact investing considerations.
Globally, more than half of the respondents said that in the last year their firms had undertaken changes in order to be more attentive to ESG risks. Eighty-nine percent of respondents said their firm has changed its voting and/or engagement policy as a result.
In addition to highlighting the importance of environmental factors, the report touched on the value of addressing various social issues to ensure the global business environment remains healthy and robust. Ninety-eight percent of investors agreed that public companies are urgently obligated to address one or more societal issues. The top five issues were Cybersecurity, Income Inequality, Workplace Diversity, National Security, and Immigration.
Finally, as to governance, Edelman survey respondents said corporate culture and conduct matter to them. Globally, ninety-five percent of respondents said the health of a company’s culture, such as enforcing a corporate code of conduct at all levels of a company, impacts the level of trust they have in a company in which they are considering investing. Sixty-five percent went so far as to say it had a great deal of impact.
The statistics presented in this report emphasize the growing global importance of ESG with investors and asset managers who are increasingly valuing environmental and social practices as much as governance and returns.
Aon Survey Shows 68% of Global Investors Consider Responsible Investing Important
Aon Hewitt Investment Consulting (“Aon”) recently released results of a survey, Global Perspectives on Responsible Investment, which shows that 68% of investment professionals considered responsible investing (“RI”) important to their organizations. Aon launched the survey after noting a dramatic increase in the number of institutional investors exploring or implementing RI initiatives. The results confirm significant interest in RI among institutional investors globally.
Between November 2017 and March 2018, Aon surveyed 223 investment professionals from across the U.S., U.K., EU, and Canada about their attitudes toward RI. Five percent reported that it was “mission critical” and 68% reported it was at least somewhat important. Responses were largely consistent across respondents from all geographic areas, though fewer U.S. investors reported that RI was “mission critical”. The top five drivers of RI reported by survey respondents were concerns about fossil fuels, climate change, bribery and corruption, renewable energy, and weapons manufacturing.
Forty percent of respondents reported that they have an RI policy already in place, while 39% reported that they do not, and 14% indicated that they were in the process of implementing one. The number one reason respondents cite for implementing RI strategies is a belief that incorporating non-financial ESG data results in better investment decisions. Other reasons cited include a desire to impact global issues, a belief that RI will outpace traditional investing, and a belief that responsible investments will be less volatile over time.
The survey concluded that RI is gaining in momentum. Thirty-one percent of respondents indicated that they evaluate RI opportunities for possible inclusion in their portfolios and 24% indicated that they plan to increase their RI allocations. Still, practical hurdles impede some investors from implementing RI strategies. Just under 50% of the investors surveyed reported having no proactive responsible investments in their portfolios, though some reported that they were working toward including them. Investors indicated that industry agreement on terms and definitions, material agreement on key ESG factors, more reliable, comprehensive and consistent data on ESG factors, and more research on return profiles would make RI more accessible in the future.
Large Investors Ask SEC to Issue Rules on ESG Disclosure Standards
Investors are demanding greater transparency of publicly traded companies on environmental, social, and governance (“ESG”) issues. On October 1, 2018, legal experts and ESG advocates, as well as investors, state treasurers, public pension funds and unions representing more than $5 trillion in assets under management filed a Request for rulemaking on environmental, social, and governance (ESG) disclosure with the U.S. Securities and Exchange Commission (“SEC”). The petition asks the SEC to develop a framework requiring issuers to make uniform disclosures of ESG information.
Investors want information that will enable them to allocate capital to long-term, socially beneficial uses. The petitioners assert that uniform disclosure is critical for evaluating companies’ long-term performance and risk management. Although companies sometimes provide ESG information, the reports are not standardized, and are neither required nor monitored. Reporting is inconsistent and in some cases not reliable. The petitioners assert that developing a comprehensive framework for clearer, consistent, complete, and more easily comparable information will bridge the gap between what investors want and what companies are providing.
The Center for American Process (“CAP”), a public policy research and advocacy organization, released a new Report on Corporate Long-Termism, Transparency, and the Public Interest to accompany the rulemaking petition. The report states that ESG factors are highly correlated with long-term risk, and asserts that “shareholders and stakeholders of all types and size do not have access to the long term-oriented information they need-in particular, ESG information in a consistent, comparable, and reliable manner.” CAP emphasizes the need for the SEC to lead the way on setting strong disclosure standards. The report notes that such a standard would ensure the protection of long-term investors, effective capital allocation, and better service of public interest.
Ninth Circuit Holds No Duty to Disclose Unfair Labor Practices under California Consumer Protection Law
On June 4, 2018, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a class action alleging that Mars, Inc. had a duty under California consumer protection laws to label goods as possibly being produced using slave or child labor. Hodson v. Mars, No. 16-15444 (9th Cir.).
The Court held that defendants had no affirmative duty to disclose information if it did not relate either to a safety hazard or to the central function of the product at issue. The Court further held such failure to label goods too far removed from the general policy against child and slave labor implicated in international declarations on human rights to constitute a violation of the spirit of those declarations. While the labor practices themselves were “clearly immoral,” held the Court, it was “doubtful” that failure to disclose the information on product labels was itself immoral. This decision suggests that California’s robust consumer protection laws are unlikely to provide a successful mechanism for holding U.S. companies responsible for including disclosures about supply-chain forced or child labor on product labels.
D.O.L. Qualifies ERISA Fiduciaries’ Obligations Regarding ESG Considerations
On April 23, 2018, the U.S. Department of Labor released Field Assistance Bulletin (“FAB”) 2018-01 qualifying Interpretive Bulletins (“IB”) 2015-01 and 2016-01, which seemed to allow some latitude for fiduciaries to consider ESG factors in investment decision-making.
FAB 2018-01 directs that while under 2015-01 fiduciaries may properly consider economic considerations derived from ESG considerations, they “must not too readily treat ESG factors as economically relevant” and should focus their evaluations of investments on financial factors with material effects on return and risk. Likewise, while ESG-driven funds may be added to the available investment options on a 401(k) plan platform, a fiduciary considering ESG factors in selecting a Qualified Default Investment Alternative (“QDIA”) would “raise questions about the fiduciary’s compliance with ERISA’s duty of loyalty.”
Similarly, where IB 2016-01 allows fiduciaries to include guidelines on ESG considerations in their investment policy statements, FAB 2018-01 clarifies that such guidelines are not obligatory and that fiduciaries managing plan assets are not always required to adhere to them. IB 2016-01 further allows fiduciaries to promulgate investment policies that contemplate that the fiduciary will engage in shareholder activities intended to monitor or influence a corporation’s management where the fiduciary reasonably believes these activities will enhance the value of the investment. FAB 2018-01, however, clarifies that this language does not suggest that individual plan investors or plan fiduciaries, including investment managers, may incur significant expense to engage directly with management on environmental or social issues, and that such expenditure would likely warrant a documented cost-benefit analysis.
FAB 2018-01 thus circumscribes the latitude implied in IBs 2015-01 and 2016-01 for ERISA fiduciaries to consider ESG factors while remaining in compliance with their obligations under ERISA.