Environmental • Social • Governance

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

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.

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.

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.

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.