Legal Considerations
in Responsible Investment
***FEATURED ARTICLE***
Department of Labor Proposed Rule re ESG Investments
On October 13, 2021, the U.S. Department of Labor announced a proposed rule titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (the “Proposed ESG Rule”). The Proposed ESG Rule would allow fiduciaries to consider climate change and other ESG factors when they select investments and exercise shareholder rights. If adopted, the Proposed ESG Rule would apply specifically to investments included in 401(k) and other defined contribution plans, as well as to defined benefit pension plans, making it possible for financial professionals to consider whether profitable investments also, for example, promote racial justice or address climate change. In short, the Proposed ESG Rule deems ESG factors to be material.
Other notable features of the Proposed ESG Rule include that it explicitly allows ESG factors to serve as a tiebreaker when a fiduciary is choosing between economically indistinguishable investment options. Further, it allows employers to treat investments promoting or adhering to ESG considerations as a default position, rather than an exception. This serves to align the fiduciary duties of investment professionals with the increasing preferences of investors and pension plan beneficiaries to include ESG factors in their investment decisions, and to place their capital in the hands of companies that support and further ESG goals. Ultimately, the Proposed ESG Rule removes the barriers imposed by the prior administration’s rules that had a chilling effect on ESG investments.
By treating ESG factors as financially material, the Proposed ESG Rule helps protect the retirement savings and financial security of America’s families. Since financial security includes planning for the future, it becomes essential that fiduciaries be allowed to consider the sustainability of their investments, a bedrock of ESG investing strategies. Ultimately, this rule can help build a more just, diverse, sustainable, and financially secure future for workers and families. Read the Full Article
Background on the Grant & Eisenhofer ESG Institute
Global investor interest in sustainable and responsible investment continues to accelerate at a rapid pace. The Global Sustainable Investment Alliance (GSIA) estimates $35.3 trillion in global assets are managed under responsible investment strategies, representing almost 36% of all professionally managed assets worldwide* – a 2% increase since the end of 2018. 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, and better long-term returns. 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, #metoo and other social and environmental issues. Corporate engagement and shareholder activism are additional approaches investors are increasingly using to influence corporate behavior in furtherance of ESG principles.
With almost a quarter century of actively protecting and promoting the rights of institutional investors and public entities, Grant & Eisenhofer has built a legacy in corporate governance with an unwavering commitment to responsible investment. The Firm has cemented this history with an initiative expressly designed to address the increasing dialogue on ESG within the institutional investor community – the Grant & Eisenhofer ESG Institute. The ESG Institute is a non-profit organization formed in 2017 with the mission of harnessing its members’ legal skills to work with investors to further a wide array of ESG goals. To this end, the Institute pursues select matters exclusively to promote legal issues related to ESG considerations, and offers thought leadership in the discipline. The Institute also aims to address, on an ongoing basis, the legal issues that decision-makers and stakeholders in the investment community grapple with in implementing responsible investment criteria.
Some of the legal issues the ESG Institute focuses on include:
- Sustainability and Fiduciary Duty
- Climate Change and Securities Law
- Corporate Legal Responsibility for Activity in Developing Countries
- International Whistleblower Developments
- Legal Challenges to Limit Compensation
The ESG Institute, currently led by G&E's Caitlin Moyna, is guided by an Advisory Board of ten members, comprised of a diverse range of investors with global experience spanning asset managers, public pension funds and nonprofits, all of whom have a demonstrated track record of commitment to ESG causes. Prior to the pandemic, the ESG Institute met periodically, hosting regular events in both the U.S. and Europe to provide a continuous forum for engagement of like-minded participants and organizations. It will resume such events following the pandemic.
* Source: Global Sustainable Investment Review 2020 released by the Global Sustainable Investment Alliance, July 2021