On September 15, 2022, Townhall published an op-ed by ATR Federal Affairs Manager Bryan Bashur. The op-ed discusses how legislators and attorneys general have been fighting back against the recent trend of investment managers of retirement funds employing environmental, social, and governance (ESG) standards for their investments in violation of their fiduciary duty as required by law.
The piece begins by explaining how investment managers’ fiduciary duty is to focus solely on providing financial returns for retirees. It states that:
The Employee Retirement Income Security Act of 1974 (ERISA), which governs over 730,000 private-sector employee benefit plans with more than $10 trillion in assets, states that plan managers are obligated to make decisions “solely in the interest” of retirees to minimize losses and maximize returns.
The article notes that some members of Congress have brought forward similar bills that amend ERISA to explicitly require that retirement money must be invested without considering ESG factors that have no effect on a company’s financial performance.
The op-ed continues to report that the American Legislative Exchange Council has created a model state bill that would require state pension fund managers to invest and vote on proxies solely in the “pecuniary interest” of retirees.
Next, the piece explains that retirement plan managers are in violation of their fiduciary duty if a “mixed motive” is involved in making an investment decision, even if the ESG investment “did not harm the beneficiaries.”
The op-ed explains that:
Indiana Attorney General Todd Rokita wrote an advisory opinion claiming that an investment manager’s commitment to climate pledges such as Climate Action 100+ and the Glasgow Financial Alliance for Net Zero “demonstrates a mixed motive inconsistent with a fiduciary duty of loyalty to act for the exclusive financial benefit” of state retirement plan beneficiaries. AGs in Kentucky and Louisiana also wrote separate opinions that could expose plan managers to potential legal liability “if they continue allocating funds to ESG-promoting asset managers.”
The article advises the AGs of the rest of the states to issue similar legal opinions and goes on to explain that trustees of private trusts also have a fiduciary duty to invest without regard to social standards. The Uniform Prudent Investor Act prohibits investment activity that entails sacrificing the interests of trust beneficiaries, such as accepting below-market returns, for the purpose of a social cause.
The op-ed then points out that overreliance on ESG factors could require managers to invest in undervalued stocks with low ESG scores:
Max Schanzenbach and Robert Sitkoff point out that for certain investing strategies managers must take advantage of the higher risk-adjusted return opportunity that presents itself with stocks that may be undervalued due to ESG pressure. It would be the manager’s obligation to invest in low ESG-scoring stocks that have potential for a profit.
Next, the article shows how there are also cases in which commercial and investment banking activities would trigger a fiduciary duty. The piece points out that:
Based on court precedent, banks have a fiduciary duty to a borrower if the borrower lacks certain knowledge and puts “faith, confidence, and trust” in the bank while the bank also has “dominion, control, or influence” over the borrower. Investment banking functions, such as underwriting municipal bonds, also have a fiduciary duty that may be based on a bank providing expert advice to a state or local government.
In conclusion, the op-ed explains that reaffirming investment managers’ reliance on financial factors to influence decision-making, rather than vague political standards like ESG, is essential to ensure that these managers are following their duties under state and federal law. The efforts of elected officials are vital to this task:
The new legislative initiatives and legal opinions should remind managers that retirees should always be at the forefront of their minds.
Click here to read the full op-ed.