Could Fiduciary Standards Be Lowered to Encourage ESG?

Groom Law says the strong push in international bodies such as the European Commission and OECD to encourage pensions to take into account environmental, social, ethical and governance (ESG) factors could spill over to the United States.

A recent issue of the Groom Law Group’s Benefits Brief notes a growing pressure on international pension funds to take ESG factors into account in their investing and to report on their use of such factors. (The ESG concept is generally similar to that of socially responsible investing.)

Most recently, it notes, at the December meeting of the OECD WPPP, a new paper supporting the enhanced use of ESG factors, “Investment Governance and the Integration of ESG Factors,” was presented that generally questions:

  • whether the traditional fiduciary rule (usually found in common law countries, less so in civil law countries) is too “narrow” and hindering the application of ESG factors in investing, and therefore should be modified;
  • whether there should be reporting on how ESG factors are taken into account; and
  • whether there should be other disclosure or policies that should be applied to support integration of ESG factors in pension investing.

The law firm also notes that comments on the paper noted that it does not define what ESG factors are (though there is certainly an emphasis on environmental factors), nor does it address the effect of different investors coming to different conclusions regarding whether a particular investment is good or bad for environmental, social, ethical or governance reasons. And while the paper surveys whether the application of ESG factors improves investment returns, it does not come to a conclusion.

Future Indications

Groom says that the Indications are that the proponents of ESG investing will continue to try to push for pension funds to invest based on ESG factors and have particular factors in mind for being good or bad, though that is not yet clearly expressed – and that such efforts could spill over to the U.S., where social investing continues to be a matter for debate, “particularly if ingrained as a global best practice, and particularly for multinational corporations.”

Last year the U.S. Labor Department, apparently concerned that prior guidance has discouraged plan sponsors from embracing “economically targeted investments,” issued an interpretive bulletin that, while reiterating its stance that the focus of plan fiduciaries on the plan’s financial returns and risk to beneficiaries must be “paramount,” and that under ERISA the plan trustee or other investing fiduciary may not use plan assets to promote social, environmental, or other public policy causes at the expense of the financial interests of the plan’s participants and beneficiaries, nonetheless acknowledged that “collateral goals” (such as ESG) could be considered as “tie breakers.”

A recent survey by TIAA Global Asset Management finds interest in the concept by investors – but that interest is not necessarily shared by advisors.

Note: The topic of ESG is just one of the pertinent advisor-centric topics on the agenda of the 2017 NAPA 401(k) Summit (Environmental “Impasse?” – What You Don’t Know About ESG… And Should). Find out more – and register today – at

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