Changing Environment for Social Investment, 0621 RIBJ, RIBJ, 69 RI Bar J., No. 6, Pg. 7

• Position: Vol. 69 6 Pg. 07

The Changing Environment for Social Investment

No. Vol. 69 No. 6 Pg. 07

Rhode Island Bar Journal

June, 2021

May, 2021

Peter J. Miniati, CFP^®, JD F.L.Putnam Investment Management Company

There is no single definition of Socially Responsible Investing (“SRI”), nor is that the only term by which such investment strategies are known. Other terms include values-based investing, ethical investing, sustainable investing, community investing, impact investing, green investing, and mission-related investing. Additionally, the values being associated most closely to these labels also vary widely, and may include religious, social-justice, ecological, political, community, or other categories of missions.

What Does ESG Investing Mean – Literally and Legally – in 2021?

Background

The Forum for Sustainable and Responsible Investing (“USSIF”) defines SRI as “an investment discipline that considers Environmental, Social and corporate Governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.”

The “ESG,” “Impact Investing,” “Socially Responsible Investment, “Divestment,”^[1]and “Sustainable Investing” terms^[2]are becoming increasingly familiar to the investing public and have been incorporated into state and federal law. These concepts are gaining prevalence in public policy discussions on investments among business leaders, advocates, philanthropic leaders, regulators, and politicians in the United States and around the world. Social dimensions of investment decisions have been introduced in the financial services industry with labels such as “Ethical/Advocacy,” “Impact/ Thematic” and the like.^{[3] ,}

^[4]

SRI concepts have been documented since biblical times, with numerous examples evident among various religious investors throughout history.^[5]For example, in Jewish law, the Talmud directs ethical investments. The Quakers prohibited investments in war efforts. Methodists have used forms of social screening of investments in the United States for over a hundred years. The Qur’an established guidelines, based on the religious teachings of Islam, which have evolved to what are now Shariah-compliant standards.^[6]The Catholic church “draws the values, directions, and criteria which guide its financial choices from the Gospel.”^[7]

In modern times, socially conscious investors have employed SRI, ESG, and Divestment to focus the use of capital toward a range of social issues. From the Vietnam War Era through today, societal goals such as civil rights, anti-war, anti-apartheid, equality for women and underrepresented groups, and global warming have been addressed through social investing strategies.^[8]And, even more recently, protests at the U.S. Capitol and other “shocking scenes... have promp[ted] a reckoning about money in politics…”^[9]A leading investment firm cited pushback from its wealth management clients after the Capitol riots as its reason to single out members of Congress who both challenged the presidential election and accepted corporate Political Action Committee (PAC) donations.^[10]

Evolution of US Business and Investment Doctrine over Fifty Years (and Fifty Weeks)

Fundamental business doctrines are being debated in popular media and financial publications with calls for reforms to policy and regulatory schemes. A quick recap highlights an evolution in how Americans view corporations and their ownership. In 1970, The New York Times published “A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits”^[11]in which economist Milton Friedman famously argued that a company has no social responsibility to the public or society. In August 2019, JP Morgan CEO Jamie Dimon, Apple’s Tim Cook, and 181 other CEOs in the Business Roundtable signed a letter espousing “stakeholder capitalism,” the belief that companies exist not to benefit just their shareholders, but also their workers, customers, and the environment.^[12]

Bank of America, the “big four” accounting firms, and the World Economic Forum have also collaborated on a framework for global ESG standards, as COVID-19 and protests over racial injustice spotlighted the case for “stakeholder capitalism.” Bank of America’s CEO Brian Moynihan outlined numerous nonfinancial metrics to gauge how well companies are addressing issues that range from the gender pay gap to environmental protection.^[13]

Nasdaq filed Proposed Rule 5605(f) with the U.S. Securities and Exchange Commission (“SEC”) in 2020 to adopt new listing rules related to board diversity. Nasdaq Inc., which owns and operates the Nasdaq stock market in the United States, proposed that all companies listed on its exchange include a minimum number of board members who self-identify in one or more of the following “diverse” categories: female, under-represented minority, or LGBTQ+.^[14]The American Civil Liberties Union endorsed the proposed rule, stating “Nasdaq is heeding the call of the moment. Incremental change and window-dressing isn’t going to cut it anymore as consumers, stakeholders and the government increasingly hold corporate America’s feet to the fire.”^[15]

Federal Regulations and Inconsistency of Approach

Andrew Ross Sorkin of The New York Times has noted that a Biden-appointed SEC chief might focus securities regulation in the new administration on ESG issues. The SEC, he writes, could consider requiring companies to disclose their political donations publicly, in a standardized way, and could order corporate disclosures about boardroom diversity (similar to the Nasdaq proposal), and could also mandate company disclosures for climate change risks.^[16]

If adopted, such an approach would contrast dramatically with the focus of a recent U.S. Department of Labor (DOL) ruling related to investment duties for fiduciaries of private-sector employee benefit plans under the Employee Retirement Income Security Act of 1974 (ERISA). That rule prohibits certain retirement plan fiduciaries from considering ESG factors in selecting investments for 401(k)s, and the final rule became effective January 12, 2021. In passing “Financial Factors in Selecting Plan Investments,”^[17]the Employee Benefits Security Administration, Department of Labor (EBSA) “requires plan fiduciaries to select investments…based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment.”^[18]

In its October 2020...