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 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 environmental, social and governance 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. Some of the legal issues the ESG Institute will focus on include: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 non-profits.
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:
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.