ABSTRACT
The market for socially responsible investing – commonly referred to as ESG (environmental, social, and governance) investing – is experiencing rapid growth. Yet a crucial legal question, that could shape this market’s potential to better our world, remains unresolved: can institutional investors consider ESG factors when making investment decisions? These investors hold a significant portion of global corporate equity, currently valued in the trillions of dollars. Consequently, they stand in a unique position from which they can influence the actions of corporations. But institutional investors also manage other people’s money. They are therefore bound by fiduciary duties that govern their investment decision-making. Do these duties prevent institutional investors from considering ESG factors?
A recent and highly influential scholarly account of the issue claims that the answer to this question is emphatically yes. On this view, fiduciary law, as expressed in the ERISA regulation, obligates institutional investors to act solely for the direct financial interest of the investors. As ESG consideration may go well beyond that, this position significantly limits the potential scope of ESG, which, in turn, could have devastating consequences for the promotion of a sustainable future. Conversely, this Article contends that such a narrow interpretation of fiduciary law is fundamentally flawed. Drawing on an analysis of dozens of cases and through a discussion of private law theories, the Article demonstrates that this restrictive legal stance misinterprets the US Supreme Court’s decisions and lacks any other compelling justifications. Correctly understood, fiduciary law can and should facilitate the most urgent need of our time: funding corporations that contribute to social welfare.
Naftali Ben Zion, Yifat, Ethical Investments (May 15, 2024).
Leave a Reply