June 5, 2018

CSG Law Alert: The ESG Investing Tug of War Continues

ESG investing is back in the news. ESG investing evaluates a company’s or fund’s environmental, social and corporate governance performance when considering an investment in company stock or fund shares. Unlike years past, it is now conventional wisdom that companies and funds with strong ESG policies are good economic investments.  Those with weak or non-existent policies are not as prudent investments because they present a greater risk of facing events or publicity that will lower their investment value.  One would think the federal government would encourage such investing but this administration, siding with companies and funds that oppose ESG investing, does not.

On April 23, 2018, the United States Department of Labor issued a Field Assistance Bulletin (FAB) that backtracks on ESG investing by employee benefit plan managers by “clarifying” an Obama era Interpretive Bulletin (IB).  The IB stated “… that plan fiduciaries should appropriately consider factors that potentially influence risk and return.  Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment.  In these instances, such issues are not merely collateral consideration … but are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”  The IB, in effect, supported plan managers who believed that ESG considerations are part of economically targeted investing.

The current administration has taken a different and potentially chilling approach to ESG investing.  “Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.  It does not ineluctable follow from the fact that an investment promotes ESG factors, or that it arguably promotes positive general market trends or industry growth, that the investment is a prudent choice for retirement or other investors.”

Fund managers who consider ESG factors may feel this FAB creates confusion instead of clarifying the government’s position.  A fund manager must also consider how and when the government will second guess an ESG investment decision.  These uncertainties likely will require additional documentation supporting the fund manager’s decision.  Whether this FAB reduces ESG investing remains to be seen.