ESG Can’t Square With Fiduciary Duty

State attorneys general issue a strong warning to investment managers and retirement fund trustees

By Jed Rubenfeld and William P. Barr. Mr. Rubenfeld is a professor at Yale Law School and an adviser to Strive Asset Management. Mr. Barr is a distinguished fellow at the Hudson Institute. He served as U.S. attorney general, 1991-93 and 2019-20. Excerpts: 

"Nineteen state attorneys general wrote a letter last month to BlackRock CEO Laurence D. Fink. They warned that BlackRock’s environmental, social and governance investment policies appear to involve “rampant violations” of the sole interest rule, a well-established legal principle. The sole interest rule requires investment fiduciaries to act to maximize financial returns, not to promote social or political objectives."

"potentially explosive, undisclosed conflicts of interest in the Big Three’s “selective” promotion of ESG criteria against U.S. companies but not Chinese companies."

"in 2021 BlackRock exercised its proxy voting rights as Exxon’s second-largest shareholder to lead “an activist campaign that forced Exxon to cut oil production,” without disclosing that many of the “oil fields dropped by Exxon” are “poised to be acquired by PetroChina” and that BlackRock is “one of PetroChina’s largest investors.”"

"BlackRock has an enormous stake in PetroChina, reporting holdings of between one trillion and two trillion shares, representing between 5% and 10% ownership, from 2018-22."

"public pension boards are “prohibited” from retaining asset managers who “make investments, set investment strategies, engage with portfolio companies, or exercise voting rights appurtenant to investments based on ESG considerations,” which the Big Three all do."

"If BlackRock is violating its fiduciary duty, so is a pension-plan board member or investment staffer who knowingly invests with BlackRock. It’s well-settled law"

"where a “fiduciary was aware of a risk to the fund . . . he may be held liable for failing to investigate” or for not “protecting the fund from that risk.”"

"social-impact investing has long been viewed as legally problematic. As stated by the drafters of the Uniform Prudent Investor Act, a model statute that has been substantially adopted by a majority of states, “no form of so-called ‘social investing’ is consistent with the duty of loyalty if the investment activity entails sacrificing the interests of trust beneficiaries . . . in favor of the interests of the persons supposedly benefitted by pursuing the particular social cause.”"

"Another defense to ESG investing asserts that ESG factors, though nonpecuniary, are material to profitability and that ESG investing will therefore produce superior outcomes. That claim appears to rest more on hope than fact. A March 2022 report in the Harvard Business Review states that “ESG funds certainly perform poorly in financial terms.” A June 2022 study found that “ESG funds appear to underperform financially relative to other funds within the same asset manager and year, and to charge higher fees,” concluding that ESG asset selection “accounted for an annual drag on returns of -1.45 percentage points.”"