On September 15, 2022, Townhall published an op-ed by ATR Federal Affairs Manager Bryan Bashur. The editorial explains how lawmakers and attorneys general have responded to the recent trend of pension fund managers applying environmental, social and governance (ESG) standards to their investments in violation of their fiduciary duty as required by the law.
The article begins by explaining how the fiduciary duty of investment managers is to focus solely on providing financial returns to retirees. It states that:
The Employees Retirement Income Security Act of 1974 (ERISA), which governs more than 730,000 private sector benefit plans with over $10 trillion in assets, states that plan managers are required to make decisions “solely in the interest” of pensioners in order to minimize losses. and maximize returns.
The article notes that some members of Congress have introduced similar bills that amend ERISA to explicitly require retirement money to be invested without considering ESG factors that have no effect on the financial performance of companies. ‘a company.
The editorial goes on 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 only in the “pecuniary interest.” ” retirements.
Next, the article explains that pension plan managers breach their fiduciary duty if a “mixed motive” is involved in making an investment decision, even if ESG investing “did not harm the beneficiaries. “.
The editorial explains that:
Indiana Attorney General Todd Rokita has written an advisory opinion saying an investment manager’s commitment to climate commitments such as Climate Action 100+ and the Glasgow Financial Alliance for Net Zero “demonstrates a motive mixed inconsistent with a fiduciary duty of loyalty to act for the exclusive financial account”. benefits” for beneficiaries of the state pension scheme. AGs in Kentucky and Louisiana also wrote separate notices that could expose plan managers to potential legal liability “if they continue to allocate funds to asset managers promoting ESG.”
The article advises AGs in the rest of the states to issue similar legal opinions and goes on to explain that administrators of private trusts also have a fiduciary duty to invest regardless of social standards. The Uniform Prudent Investor Act prohibits investment activities that involve sacrificing the interests of trust beneficiaries, such as accepting below-market returns, for the purpose of a social cause.
The editorial then points out that an overreliance on ESG factors could force managers to invest in undervalued stocks with low ESG scores:
Max Schanzenbach and Robert Sitkoff point out that for some investment strategies, managers need to take advantage of the opportunity for higher risk-adjusted returns that arise with stocks that may be undervalued due to ESG pressure. It would be the manager’s obligation to invest in stocks with low ESG scores that have the potential for profit.
Next, the article shows how there are also instances where commercial and investment banking activities would trigger a fiduciary duty. The document states that:
Based on court precedents, banks owe a fiduciary duty to a borrower if the borrower lacks certain knowledge and puts “faith, trust and confidence” in the bank while the bank also has “dominion, control or influence” over the borrower. Investment banking functions, such as municipal bond underwriting, also have a fiduciary duty that may be based on a bank providing expert advice to a state or local government.
In conclusion, the editorial explains that it is essential to reaffirm the reliance of investment managers on financial factors to influence decision-making, rather than vague political standards like ESG, to ensure that these managers meet their obligations under state and federal laws. The efforts of elected officials are essential to this task:
New legislative initiatives and legal opinions should remind managers that retirees should always be at the forefront of their concerns.
Click here to read the full article.