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Fiduciary Duty and Socially Conscious Investing – Guidance for Investment Managers and the new DOL Fiduciary Rule
By Guest Contributor

By Greg Jackson, 2016 SRI Conference Scholar

The updated guidance issued by the Department of Labor (DOL) in October 2015 acknowledged that fiduciaries can proactively apply Environmental, Social, Governance (ESG) factor analysis when making investment decisions, and that those factors may have a "direct relationship to the economic and financial value of an investment."

What is a fiduciary? Under the Employee Retirement Income Security Act of 1974, or ERISA, an adviser is considered a fiduciary when it is their obligation, among other things, to act prudently and solely in the interest of their client.

At this past year's 27th annual Conference on sustainable, responsible, impact (SRI) investing, this new guidance was featured in the session, "Fiduciary Duty and Socially Conscious Investing" where it discussed the details of how fiduciaries can use the DOL ruling to justify engaging in SRI investing to shareholders.

Rich Lynch is the Principal of Fi360, a firm which helps financial intermediaries use prudent fiduciary practices to manage assets. Fi360 publishes a toolkit for advisors on fiduciary responsibility and using fiduciary precepts to guide investment decisions. Mr. Lynch discussed how an increasing number of investment advisers agree that "using social screens not only makes sense, but failure to consider social screens could represent a breach of fiduciary responsibility under the core precept duty of impartiality." This responsibility includes risks that may impact future generations more than older ones. Moreover, the use of social screens for ESG factors makes more and more sense as the investment time horizon extends. The group's toolkit urges investment managers to use fiduciary precepts to guide investment priorities, and Mr. Lynch pushed for more widespread adoption of these core principles as a starting point for expansion of ESG factors in investment priorities, especially among advisers who are less likely to attend the SRI Conference. Furthermore, Mr. Lynch claimed that analyzing all investments through an ESG lens, rather than the common practice of treating SRI as an investment class on its own, would also lead to more widespread adoption of the set of seven fiduciary principles. These are seven precepts (see insert) that Lynch believes are general best practices for all investing.

Mr. Lynch argued that the selection of financial managers needs to include not just quantitative factors, but also qualitative factors with an expectation that they consider factors beyond just financial performance. He cautions that advisors looking to employ ESG screens make it clear in Investment Priority Statements (IPS) that the firm uses such screens when making investment decisions. This not only clearly communicates the investment approach, but can also differentiate firms from their competitors in a field where more and more investors are looking to use ESG screens. Documenting the use of ESG screens also fits within the fiduciary precept of loyalty.

Jim Hawley of TruValue Labs further commented on the DOL decision and its impact on the SRI sphere, including the likelihood that rulings on fiduciary responsibility may soon shift to state courts. Mr. Hawley also discussed materiality of investments, and the idea that material factors are either "not yet financial" or "emerging financial."

Betsy Moszeter, COO of Green Alpha Advisors and moderator of the panel, echoed that long-term risks such as climate change and social equality are increasingly important, and if fiduciaries fail to consider these factors in investments, they are not fulfilling their fiduciary obligations. Ms. Moszeter also indicated that it is entirely possible that holding stocks in fossil fuel companies, or other companies that violate ESG principles, could be considered negligence on the part of investment managers.

An aspect of fiduciary obligation that was debated but not fully agreed upon was proxy voting. Bigger traditional investment banks generally base proxy votes solely on financial performance. The question remained: how can we steer traditional investors towards integrating ESG factors into their investment priorities, and thus adhere to fiduciary responsibility of considering factors beyond the financial bottom line in making investment decisions.

The extent to which traditional investors will integrate ESG factors could likely be affected by the new administration's appointments to the SEC and other government bodies. Still, regardless of government actions, investors can continue voluntarily choosing to include ESG factors in their investment priorities. Fortunately, although the ruling does not force fiduciaries to integrate ESG factors into investment decisions, the trend has been towards attention to these factors. Furthermore, its implementation is one major way asset managers can differentiate themselves from traditional banking, especially for investors seeking to align investment priorities with personal or organizational values. To learn more about this topic, view the session here.

The DOL rule was originally intended to go in to effect on April 10th, but was delayed 60 days in early April to go in to effect June 9th. We will see if this is further impacted by the new administration.

First Affirmative understands that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impact our money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions?

NOTE: Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: April 7, 2017