PLANSPONSOR - February/March 2020 - 6

The Climate Change Dilemma
RULES & REGULATIONS
D
o plan sponsors have a fiduciary
duty to consider climate change
when choosing investments?
George Michael Gerstein, fiduciary
governance group co-chairman at Stradley
Ronon Stevens & Young LLP, notes that,
since the mid-2000s, a conversation has
been building, urging institutional investors
to consider the environmental, social
and governance (ESG) impact of the funds
they choose, to make their decisions based
on collateral objectives, such as to avoid
companies with a stake in firearms. As
a result, the Department of Labor (DOL)
weighed in, issuing Field Assistance
Bulletin (FAB) No. 2018-01. In this, it cited
2008 guidance: ESG investing factors
could serve as a tiebreaker when considering
economically similar investments.
As for whether there is a fiduciary
obligation for plan sponsors to take specific
action to mitigate the risk of climate
change, Gerstein says he does not see one.
Plan sponsors might " think these
risks are baked into share prices already.
There's an idea that, particularly with U.S.
securities in a highly efficient market,
if there's a hidden risk, the share prices
would already reflect that, " Gerstein says.
He adds, decisions in early cases suggest
6 PLANSPONSOR.COM February - March 2020
courts generally believe that rule applies.
Yet, he continues, " some very public
officials " say no risk has thus far been
reflected-i.e., stocks in companies such
as fossil fuel producers have not reacted
to climate change reports. So, it seems
unlikely that participants could successfully
challenge a sponsor for not acting,
he says, " not until there becomes a greater
mountain of evidence that the risk is incorporated
into share prices. Because we're
in early days of understanding the link
between climate change and investment
performance, I believe courts will wait for
the data to be more refined. " (See " Seize
the Opportunity, " page 34.)
Gerstein contends that any correlations
between climate change policies
and investment performance tie in to a
broader issue regarding federal securities
law. He says one of the obstacles to
greater ESG policy adoption is a lack of
good disclosure by issuers in terms of how
climate change affects their bottom line
and how they mitigate the risk.
Maximilian Horster, Ph.D., managing
director and head of climate solutions at
Institutional Shareholder Services Inc.
(ISS)-the owner of PLANSPONSOR-
ESG in Germany, says some firms have a
Art by Simone Virgini
service that will inform investors whether
any of their holdings could be negatively
affected by climate change and how. He
points to a case in Australia, in which a
24-year-old environmental scientist has
sued his pension fund for inadequately disclosing
or assessing how climate change
could affect its investments. His purpose,
Horster says, is to raise fiduciaries' awareness
of their duty to consider the risks.
Gerstein says, as part of plan investment
committee meetings, it would help to
review any studies and public statements or
actions taken by large asset managers globally.
" When there are very large, respected
investment managers making significant
pronouncements on these issues, committees
should be aware of and discuss them, "
he says.
Late last year, BlackRock announced
it will accelerate efforts to rework its technology,
risk management and product
choices with sustainability principles in
mind. The firm said, " This shift has been
driven by an increased understanding of
how sustainability-related factors can affect
economic growth, asset values and financial
markets as a whole. " It said the most
significant of these factors today relate to
climate change. -Rebecca Moore
http://www.PLANSPONSOR.COM
PLANSPONSOR - February/March 2020

Table of Contents for the Digital Edition of PLANSPONSOR - February/March 2020
