Environmental, social and governance issues (“ESG”), are the key factors in measuring investment sustainability and social impact. ESG Investing has become an ever more important issues among major investors as each seeks to add ESG factors to their responsibilities as fiduciaries.
ESG Investing is essential “socially conscious” investing, “stakeholder capitalism.” Both terms are about the idea that a public company’s focus shouldn’t be simply about generating profits to reward shareholders without taking a bigger (ESG) impact into account.
Investing to meet objectives for environmental, social and governance issues may have a significant impact on economic development in the future, whether at a national, regional or local level. The major financial institutions are now exploring ESG investing implications, including central banks, sovereign wealth funds, and public pension funds. Representatives of local governments and agencies will want to be well acquainted with ESG investing expectations, to best structure programs that meet ESG objectives.
The Organization for Economic Co-operation and Development (“OECD” based in Paris, France) is among numerous international organizations seeking to promulgate ESG Investing standards. According to its website, OECD together with governments, policy makers and citizens, works on establishing evidence-based international standards and finding solutions to a range of social, economic and environmental challenges. From improving economic performance and creating jobs to fostering strong education and fighting international tax evasion, OECD provides a unique forum and knowledge hub for data and analysis, exchange of experiences, best-practice sharing, and advice on public policies and international standard-setting.
U.S. Department of Labor’s Investment Duties Rule
The U.S. Department of Labor announced on in October 2020, a final rule that updates and clarifies the Labor Department’s investment duties regulation (in 29 CFR 2550.404a-1). The final rule intends to provide clear regulatory guideposts for fiduciaries of private-sector retirement and other employee benefit plans in light of recent trends involving environmental, social and governance (ESG) investing.
The final rule amends the Department’s longstanding investment duties regulation, first issued in 1979, to codify a clear regulatory structure for considering investments for ERISA plans. The amendments require plan fiduciaries to select investments and investment courses of action based (solely) on pecuniary factors – i.e., any factor that the responsible fiduciary prudently determines is expected to have a material effect on risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy. By implication, non-pecuniary factors such as implied by ESG Investing sensibilities, are not to be considered when acting as an investment or asset management fiduciary.
Directing investments to meet environmental, social and governance Issues, as well as pecuniary investment returns, will be an interesting responsibility for fiduciaries in coming years.