Environmental, social, and governance (ESG) investment strategies have become a celebrated and dominant trend in the financial sector, but few of the top legal minds have examined the ways that ESG strategies can be misused, creating liability for fiduciaries and financial institutions.
The purpose of ESG criteria is to accomplish “socially responsible” goals for the individual investor or for society generally. Such investments appeal to the younger generation who are becoming the beneficiaries of the largest wealth transfer in history—an estimated 68 trillion—from the eldest generation to their heirs. Financial institutions are anxiously positioning themselves to manage these inherited funds, and therefore, to offer ESG investments.
ESG criteria are appropriate for the individual investor who uses personal funds and selects investments according to his or her preferences. Legal improprieties can arise, however, when fiduciaries make political choices with funds belonging to a third party, such as a pensioner, or when parties act in concert to harm a targeted industry to achieve ESG goals. This White Paper by the Boyden Gray Associates and the Texas Public Policy Foundation examines a sampling of possible liability triggers for those employing ESG strategies:
- Group boycotts, such as banks’ coordinated divestment of fossil fuels, could violate antitrust laws;
- ESG retirement plans could violate ERISA and public pension laws that require managers to invest solely for the purpose of maximizing financial returns for pensioners and beneficiaries; and
- ESG divestment campaigns that pressure lenders to breach existing or prospective contracts with targeted companies could constitute tortious interference with contract.
The White Paper also offers solutions for protecting parties from unlawful action. Federal and state legislators and regulators can strengthen fiduciary requirements and forbid discrimination against politically targeted businesses. States can follow the example of Texas which passed a law in 2021 to divest state and local assets from financial institutions that collude to commit antitrust violations or to deny financing or services to politically targeted businesses operating within the state’s jurisdiction.
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