Tibble v. Edison International provides an opening for ESG advocates.
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On May 18, 2015, the U.S. Supreme Court held that trustees have a fiduciary duty, emanating from trust law, to timely and continually monitor fund investments and to remove imprudent ones. The duty to monitor, the unanimous court held, is present in addition to their duty to exercise prudence in the initial selection of investments. Further, the court found that breaches of fiduciary duty may occur when investment fees are not properly considered. See Tibble v. Edison International
The simple language of this case provides a powerful opening for responsible investment advocates. To take just one concrete example, the effects of climate change on investments and on society was not an issue when many holdings were purchased. Today it is. Thus, trustees must consider what effect climate change has on their investments now, not what effect it had at some time in the past when fund investments were initially purchased. A failure to do so may constitute a breach of fiduciary duty.
In the case, the claimants argued that the trustees of the Edison International defined contribution pension plan “acted imprudently by offering six higher priced retail-class mutual funds as plan investments when materially identical lower priced institutional-class mutual funds were available.” The lower court dismissed this claim, applying ERISA’s six-year statute of limitations from the date the investments were initially offered in the plan. By finding this duty to monitor, however, the U.S. Supreme Court held that ERISA’s six-year statute started running whenever a failure to monitor occurred. ERISA, the Employee Retirement Income Security Act of 1974, covers trustees of private pension and benefit plans and is the template used by many public plans when considering their duties, making it is the most important law in the U.S. which speaks to fiduciary duty.
This short unanimous opinion should have wide reaching ramifications for trustees and for responsible investment in the United States, as fundamentally the question of what is a breach of fiduciary duty lies with
the judiciary not with opinions of fiduciary lawyers or well-meaning advocates. So, if supporters of responsible investment can carry the day on the importance of investors’ consideration of ESG factors, the failure of trustees to regularly monitor for these risks may constitute a breach of their fiduciary duty. For promoters of responsible investment, there are three important issues that emanate from the unanimous opinion.
First, the court affirms that trust law is the touchstone for analysis when trustee duties are considered. The court wrote that: “In determining the contours of an ERISA fiduciary’s duty, courts often must look to the law of trusts.” While this may seem like just so much legal gymnastics, the language of the opinion validates the responsible investment approach to fiduciary duty that emanates from trust law. See: “The Time Has Come for a Sustainable Theory of Fiduciary Duty in Investment,” Hofstra Labor and Employment Law Journal, Vol. 29, 115 – 139 (Winter 2011-2). Given the paucity of legal decisions interpreting ERISA duties as they might apply to responsible investment, the court’s reaffirmation of trust law is a boon. For many trustees and responsible investment advocates, pronouncements by fiduciary lawyers or their opinion of what the U.S. Department of Labor “might” do in interpreting ERISA have closed avenues. These lawyers, often called ‘Doctor No’s’ for constantly stopping trustees from considering ESG factors, seemed to draw their judgments like Mayan priests of old from some secret stash of knowledge, unavailable to commoners. With the affirmation that trust law is paramount, the hundreds of decisions of American courts on the meaning of fiduciary duty in trusts become relevant. The court itself cited several old cases, one which was issued in 1891. This will democratize the discussion in the boardroom. Second, the decision puts the onus back on trustees for investment decisions. Trustees who believe they can be “sleeping governors,” to use an Australian phrase, may be sadly mistaken in the future. Buoyed by the investment consulting industry and
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