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As You Sow Claims Plan Sponsor Violated ‘Climate’ Fiduciary Duty

ESG Investing

As You Sow, a nonprofit shareholder advocacy organization, is scouring Department of Labor Form 5500 filings to identify and rate employer-based retirement plans it says perform poorly with its proprietary “sustainability scorecard.”

In a letter to one company that received a low environmental and social retirement plan score, As You Sow CEO Andrew Behar seemed to suggest there may be a breach of fiduciary duty in failing to address the issue.

“… [company name redacted] has failed to address the material risks of climate change in its 401(k) plan in alignment with the duty to select retirement plan investment options in the best interests of plan participants and beneficiaries,” Behar wrote.

Behar repeatedly cited, an As You Sow-affiliated website that contains scorecards for major corporations, as well as target date funds it ranks as subpar for sustainability, including Vanguard, BlackRock, and Fidelity. It then directs visitors to its “action center” to pressure employers to adopt ESG principles within their plans.

Behar concluded by requesting a meeting with the company, claiming that “Failing to satisfy this basic duty could be a liability for [the company], creating reputational risk and making it more difficult to retain employees increasingly concerned about catastrophic climate impacts.”

In a follow-up interview, Behar conceded it’s not technically a fiduciary breach but emphasized that failing to consider climate risk is a disservice to plan participants. 

“Well, you, of course, open up the ERISA can of worms immediately,” he said. “According to ERISA, you now can and should be evaluating all risks. At this point, I’ve got to say that not considering factors like risk associated with climate change, racial justice, diversity, equity, and inclusion is really pretty short-sighted. Maybe it’s not legally a fiduciary breach, but it’s certainly not something that one would expect your fiduciary to do.”

Congressional Criticism

While As You Know insinuated a possible fiduciary breach from ignoring investment-related climate change issues, recent actions from ESG supporters and detractors made clear this is not the case.

In its condemnation of the now-vetoed H.J. Res. 30, a resolution blocking the 2022 Biden Administration rule finalized by the Department of Labor (DOL) relating to “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” the White House said ERISA fiduciaries can consider factors such as corporate accountability and transparency, climate, and liability risks “if they find them relevant to the analysis of an investment’s risk and return, in the same way that they would prudently consider other relevant factors.”

However, the administration emphasized, “To be clear, the 2022 rule is not a mandate—it does not require any fiduciary to make investment decisions based solely on ESG factors.”

Nonetheless, Behar argued that “Given the threat climate change poses to workers’ life savings, [the company] should demonstrate that it is safeguarding employee financial security over time by mitigating climate-change-related financial and economic risks as part of a prudently constructed lineup of funds.”

“It is important to keep in mind that As You Sow has an agenda,” ERISA expert and Faegre Drinker Biddle & Reath partner Fred Reish countered. “While that may be a good agenda, it is not the same as a fiduciary requirement.”

He explained that, from an ERISA fiduciary perspective, plans must select investment options with prudent risk and return profiles.  

“A variety of factors can have a material impact on the risk and return profile of an investment,” Reish added. “Where those factors are reasonably [thought] to have a meaningful impact on the risks and returns of investments, they should be considered. But, where a factor does not have that kind of impact, it should not be considered. The importance of any particular factor, and the weight given to it, is in the province of investment professionals.”

Letter of ‘Intent’

The letter and scorecards are part of a broader effort to force more alignment of 401(k) investment menus with corporate standards regarding sustainability initiatives.

Last year, As You Sow filed several corporate resolutions to that effect with Amazon, Comcast, and Microsoft. The efforts failed, with the Amazon proposal receiving 9.1% of the overall shareholder vote, Comcast garnering just 6%, and Microsoft at 11.21%.