Divestment Can Be Part of Fiduciary’s Responsibility
By Tyler Collins
Pension & Investments’ recently published an editorial, “Misdirected Furor,” which featured a cartoon depicting pension funds that consider social issues in their investment strategies as lemmings following each other off a cliff. "Divesting is a misguided reaction," according to this P&I commentary. "Pension fund trustees are fiduciaries; their plans are not agents of social change."
First Affirmative applauds Adam Kanzer’s thoughtful response. Kanzer, Managing Director and General Counsel of Domini Social Investments wrote an article entitled, Divesting Is an Exercise in Real Fiduciary Care in which he notes that the original P&I editorial was based on “several well-worn misconceptions about social investing and fiduciary duty."
"Finance lacks clear imperatives to maximize life and the priceless things that sustain it, such as clean air and water," Kanzer observed. "Finance knows no imperative to safeguard children."
He argued that fiduciary responsibility extends beyond merely maximizing profits to include "the process of prudent decision-making in conformance with a duty of loyalty… If fiduciary duty [simply] meant ‘maximize returns’, [then] we'd have no need for fiduciary duty at all.”
Kanzer cited the 2005 Freshfields report, and the 2009 follow-up report by the Asset Management Working Group of the United Nations Environment Programme Finance Initiative. These groundbreaking reports determined that including environmental, social, and corporate governance (ESG) factors into the investment process is not only permitted by law, but in some cases may be required.
Kanzer asserts that the notion that ESG issues are disconnected from financial returns and therefore should not be considered by fiduciaries is pure myth. “A modern fiduciary must understand how the corporation affects the health of the systems upon which it depends for its long-term survival." And he reminds us that "this myth was put to rest ages ago by the performance of the MSCI KLD 400 Social index."
Noting that the marketing strategies of firearms companies increasingly focus on getting guns into the hands of children, Kanzer wrote, “Newtown presents a very concrete example of what a violation of the [fiduciary] duty of loyalty looks like. If you use my money to make a weapon that kills my child, don't tell me that in 20 years I'll retire with more money…”
He points out that despite opinions to the contrary, pension funds are in fact agents of social change—noting the effect of Freedom Group’s use of pension fund capital to change the retail gun environment. However, he also notes the effectiveness of divestment, with Cerberus Capital Management LP announcing the sale of Freedom Group at the request of CalPERS.
Mention of specific companies or securities should not be considered a recommendation to buy or sell that security. Past performance is no guarantee of future results.
Posted: March 7, 2013