“One of the big changes since 2008 has been that the market awareness of the financial materiality of ESG issues has grown. Increasingly analysts are analysing and measuring the financial impacts of ESG issues.”

Judith Mares (Deputy Assistant Secretary, Employee Benefits Security Administration, U.S. Department of Labor)

Drivers for Action

Interviewees were optimistic that the number of investors using ESG investment strategies, in particular the integration of ESG issues into investment research and decision-making processes and shareholder advocacy, will increase over time. They pointed to a number of distinct drivers: the growing market awareness of the financial relevance of ESG issues, market understanding of the differences between ethical screening and ESG integration, better disclosures from corporations on their ESG performance, and wider societal trends such as customer interest in issues such as climate change and human rights.

However, there was also a recognition that change is likely to be relatively slow and piecemeal. In part this is due to the barriers to progress (see below). However, interviewees cautioned that even if all of these barriers were addressed, the traditional interpretations of fiduciary duty (in particular, the emphasis on short-term performance, the definition of beneficiary interests as being exclusively defined in financial terms and the view that wider social or environmental issues should be not considered in investment decision-making) still represent major obstacles to change.

Barriers to progress

Interviewees identified a number of distinct barriers to progress:

  • The lack of regulatory guidance or court decisions on how responsible investment aligns with fiduciary duty. Interviewees pointed to the importance of having clarity on (a) timeframes (or the definition of ‘long-term’), (b) the specific activities that should form part of investors’ approach to responsible investment, and (c) the issues that should be considered in investment research and decision-making processes.
  • The advice being provided by legal advisers and investment consultants. Interviewees commented that advisers and consultants continue to argue for very narrow interpretations of fiduciary duty, and to stress that delivering short-term, financial performance is the key expectation of fiduciaries. This, in turn, acts as a brake on asset owners’ willingness to adopt long-term investment.
  • Commonly held views about responsible investment. Among those identified by interviewees were the perceptions (or misperceptions) that responsible investing is prohibited under ERISA guidance, that taking account of ESG issues in investment practice goes against the fiduciary duty concepts of prudence and loyalty, that a focus on ESG issues negatively affects investment performance, and that responsible investment is the same as negative screening. This is particularly applicable to the private pension market.
  • The lack of knowledge on ESG issues among investment consultants and legal advisers. Interviewees commented that, because many investment consultants and legal advisers are not familiar with responsible investment, they tend to argue that responsible investment may violate ERISA’s exclusive purpose rule (often using the Department of Labor’s 2008 Bulletins to support this argument).
  • The lack of robust evidence on the relationship between environmental and social issues and investment performance. Interviewees did point to corporate governance as an issue where there is good academic research on the investment relevance of these issues, and where there has been legal clarification (e.g. in the Enron case) of governance expectations.
  • The weaknesses and inconsistencies in corporate reporting on environmental and social issues. This makes it difficult for investors to take account of these issues in their investment processes.
  • The lack of consensus among beneficiaries, or in wider society, on the ESG standards expected of companies.
  • The energy dependence of the US economy. This is particularly important in states where coal, oil and mining are economically important, where there is a perception that responsible investment may conflict with the state’s core economic interests.


In addition to the global recommendations, we recommend that:

Department of Labor

The Department of Labor should:

  • clarify that:
    • fiduciary responsibility requires a long-term, risk-adjusted approach to management of pension assets so as to deliver sustainable retirement benefits to participants and beneficiaries in an impartial manner;
    • asset owners should pay attention to long-term factors (including ESG issues) in their decision-making, and in the decision-making of their agents;
    • asset owners are expected to proactively engage with the companies and other entities in which they are invested;
    • these actions are consistent with asset owners’ fiduciary duties.
  • reissue its 2008 bulletins on Economically Targeted Investments and on Shareholder Rights, and:
    • clarify that asset owners’ duty is to impartially serve the interests of participants and beneficiaries;
    • clarify that the assessment of the costs and benefits of risk management measures such as active ownership should explicitly consider the long-term benefits of such measures;
    • clarify that green investments can make important financial and risk mitigation contributions to investment portfolios.
  • require asset owners to say how they integrate ESG issues into their investment decisions. As part of these requirements, the Department of Labor should commit to:
    • review progress annually;
    • explain how asset owners integrate ESG issues into their investment processes;
    • analyse how these commitments have affected the actions taken and the outcomes achieved (where the outcomes relate to both investment performance and to the ESG performance of the entities in which they are invested).

New York Stock Exchange (NYSE) and Nasdaq

The New York Stock Exchange (NYSE) and Nasdaq, given their scale and influence, should strengthen their ESG disclosure requirements for companies, in accordance with their public commitment to the Sustainable Stock Exchanges (SSE) initiative to promote long-term sustainable investment and improved ESG disclosure and performance among companies listed on their exchange.

Read Fiduciary duty in the 21st century: United States roadmap