Not considering financially material ESG (Environment Social Governance) factors is breaking fiduciary duty and the law under US ERISA (The Employee Retirement Income Security Act of 1974 ) law, under one interpretation.
The argument follows the October 2015 US Department of Labor (DoL) Guidance contained in the Interpretive Bulletin Relating to the Fiduciary Standard under ERISA in Considering Economically Targeted Investments and can be found here with the pdf here. Of course, DoL interpretation is not the law, and this interpretation of ERISA has not been tested in the US courts as far as I know, but it seems a valid approach in my view. The Bulletin was mainly dealing with guidance on when Trustees can look at ESG factors, but it seems to me this then applies for all investments.
"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 considerations or tie-breakers, but rather are proper components of the fiduciary's primary analysis of the economic merits of competing investment choices."
Now it seems to me that where ESG is material and I will contend every single company will have a material ESG matter (positive and, or, negative) connected with it, then not considering that ESG factor would break the above interpretation and so thus not be prudent under ERISA law. This seems to me back up by this line of thinking by lawyers Groom Law Group and Morgan Lewis, PRI sponsored.
This means Asset Owner who do not assess ESG and through Asset Managers who also do not assess ESG will be open to a beach of fiduciary duty claim. Asset Owners may try and pass the onus on to Asset Managers, but are likely still liable, in my view.
An obvious avenue of complaint might be through climate risk / disclosure considerations (although I can not see any such type of litigation through this avenue currently), but in my view any company stock that suffers from a material loss via an ESG factor (Valeant?), and the fund manager can not show that the portfolio manager (PM) involved actually assessed the ESG risks/opportunities, then the fund manager will be in breach, as will potentially the asset owner trustees.
Now the PM can show he considered ESG but came to the wrong conclusion. I suspect that would be enough to not breach ERISA. It is the process and not the outcome that matters foremost under fiduciary duty (as understood by UN here and going back to 2005 here) However, if it came to Court the PM would certainly need to show that ESG was considered, and if the PM could not I do not easily see how he can claim to have not breached ERISA. It would not be prudent. Similarly if the asset owner trustees (and consultants) chose the PM without assessing the ESG process they would likely be in breach, in my view.
In which case, who are these crazy 25% of US Fund Managers who do not consider ESG (and who out of that is advising them ESG might be a breach of fiduciary duty, the complete opposite of what the law likely says? see item 5 on the survey).
This 25% comes from this academic paper here by Amir Amel-Zadeh (University of Oxford) and George Serafeim (Harvard University - Harvard Business School). The paper makes interesting reading on other considerations as well. One for another post. I comment on one of Serafeim's other papers on material sustainable factors here.
Although the laws are different in every country, in the UK this legal opinion also chimes with this line of thinking. Essentially, if an ESG factor has a material financial risk/opportunity attached to it (and arguably Climate risk does as do many others falls under this) then it should be looked at.
"It is our opinion that the position in common law is sufficiently clear that it is not reasonably open to challenge. Further, and also of relevance to the discussion below, we are of the clear view that if the trustees are made aware of something that gives rise to a material financial risk (including any ESG factor that gives rise to a material financial risk) then not only can they take that into account when making investment decisions but they are obliged to do so; in other words, they can and must take it into account."
ClientEarth (activist lawyers) took opinion (April 2017) from two leading UK barristers, including pensions expert Keith Bryant QC, and it can be found here with press release here. This also means UK trustees and asset owners who do not have an ESG process / consideration could also be in breach of the law and be open to claims. The number of Fund Managers in Europe ignoring ESG is not as crazy as the 25% in the US, but at around 15% is still significant.
Have a read of Australian bank CBA, being sued over lack of climate related risk disclosure as another avenue for activists, along with AGM proxy battles.
Disclaimer: I am not a lawyer, this is not legal opinion. Just a thought. It does not constitute advice of any kind, legal, financial or magic. I'm not even proving the sun will come up tomorrow. You shouldn't base any life decision on read a blog.