Paul L. Caron

Wednesday, December 8, 2021

Zelinsky: The Proposed Regs On Environmental, Social And Governance (ESG) Investing

Edward A. Zelinsky (Cardozo), Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights:

DOL’s proposed regulations about ERISA’s fiduciary duties of prudence and loyalty weaken the protection of America’s workers and retirees. Accordingly, these proposed regulations should be amended to delete the imprudent, unproven and ambiguous term 'ESG', to add more balanced examples which reduce misperceptions of ERISA’s fiduciary duties, and to expunge altogether the concept of tie-breaking which violates the duty of loyalty by encouraging the pursuit of collateral benefits.

The fundamental claims of ESG advocates are economically implausible. Such advocates assert that they consistently outperform and manipulate competitive markets. This claim is unpersuasive.

ESG proponents assert that a person making an ESG investment is overriding the market’s allocation of resources to pursue a greater good. This claim is economically unconvincing. When a self-declared ESG-investor sells a stock in a competitive market, another investor without her qualms buys it. This is simply a game of musical chairs which, while it makes the ESG-investor feel better, shuffles ownership without altering the market-driven allocation of resources.

The other major claim of ESG advocates is that ESG investing, with its often high fees and active management, can consistently outperform competitive markets. This claim too is economically unpersuasive. If a corporation’s superior governance or more humane labor practices improve a corporation’s financial prospects, the corporation’s stock price will capture that projected income. A conventional, passive investment device, such as a low fee index fund, will reflect that increased value without invoking the ESG label and without paying fees for ESG investing services. It is implausible that ESG funds will consistently outperform competitive markets in which prices efficiently reflect corporation’s projected earnings including projected income stemming from so-called ESG factors.

DOL’s proposed regulations improperly perpetuate and liberalize the unpersuasive canon of 'tie-breaking' and thereby jeopardize the retirement assets of workers and retirees. The fiduciary duty of loyalty requires exclusive consideration of participants’ welfare – even in the face of so-called 'ties'. Under the proposed regulations, fiduciaries desiring to pursue otherwise proscribed collateral benefits will, deliberately or inadvertently, be encouraged to declare ties to free themselves from the duty of loyalty and its prohibition on the pursuit of third party benefits. Contrary to the teaching of the proposed regulations, the exacting duty of loyalty is not suspended in the presence of 'ties'.

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