April 2015
For decades many considered that ethical investing, socially responsible investing and similar value based doctrines had no place in the investment decision making process because those type of considerations were thought not to be germane to the purpose of a pension trust, which is to serve the best financial interests of the beneficiaries. Today “Environmental, Social and Governance” (“ESG”) factors are now considered an essential part of pension plan investment decision making. ESG is now considered to be good business. In October 2005, the United Nations Environment Programme Finance Initiative (UNEP FI), a global partnership between the United Nations Environment Programme and the private financial sector, issued a report entitled “A legal framework for the integration of environmental, social and governance issues into institutional investment” which contained the following passage:“Conventional investment analysis focuses on value, in the sense of financial performance. As we note above, the links between ESG factors and financial performance are increasingly being recognised. On that basis, integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.”
Pension plan trustees now must consider how to accommodate the new reality. In doing so it must be remembered that ESG is simply part of the age old task of trustees to assess value and risk. ESG is not a signal that it is open to trustees to advance any particular moral, political or social ideology they might favor personally.
Engagement and shareholder activism are tools commonly employed to advance ESG. However, “Divestment” has become the new buzz word in the current discussion, particularly with reference to fossil fuels. The decisions ahead will not be easy ones for pension plan trustees, but there is guidance to be found in the long established legal principles of trust law.