Fiduciary Duty And ESG Engagement

US institutional investors are governed by legal standards like those contained in the Employee Retirement and Income Security Act (ERISA) and similar laws that are relevant to their engagement with companies. However, these statutory fiduciary duties are also supplemented by a body of case law that governs trustees generally. The US Supreme Court has confirmed that Congress's intent was to incorporate trust law into ERISA when it was enacted. "Rather than explicitly enumerating all of the powers and duties of trustees and other fiduciaries, Congress invoked the common law of trusts to define the general scope of their authority and responsibility." Central States v. Central Transport, 472 US 559 (1985)

The law of trusts contains several well-established concepts that are particularly relevant for today's fiduciaries as they seek to engage with issuers:

Duty of Impartiality: The duty of loyalty includes an obligation to identify and fairly balance conflicting interests of different beneficiary groups, including those of younger and older generations.9 This makes short-term earnings, long-term wealth creation and risk exposures over both time frames equally important for long-term investors. The US Supreme Court confirmed that the duty of impartiality applies to ERISA: "The common law of trusts recognizes the need to preserve assets to satisfy future, as well as present, claims and require a trustee to take impartial account of the interests of all beneficiaries." Varity v. Howe, 516 US 489 (1996) Standards of Prudence Evolve: Understanding of fiduciary duty has been relatively stable for a generation. However, fiduciary principles are dynamic concepts that evolve over time in response to advances in knowledge and changes in circumstances. For example, a generation ago, pension fiduciaries were generally precluded from trading in stock because it was seen as an imprudent investment.10 Today, with the unprecedented growth of institutional investor assets and their collective economic impact, and the greater appreciation of shortcomings in prevailing investment theories that became evident during the recent financial crisis, understanding of fiduciary principles is once again in flux.11 "Trust investment law should reflect and accommodate current knowledge and concepts. It should avoid repeating the mistake of freezing its rules against future learning and development." Restatement of Trusts (Third) §227, Introduction (1992) These trust law...