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Fiduciary Responsibility: The ESG Element

Fiduciaries have a responsibility to increase beneficiaries’ options, acting within contributors’ constraints. This means that fiduciaries must act in beneficiaries’ economic best interest, while minimizing risks associated with externalities. In addition to generating economic returns, fiduciaries have a responsibility to minimize environmental, social, and governmental (ESG) risk factors by generating ESG returns.

The concept of property rights implies that individuals own assets, both tangible and intangible. Capitalism is a means for society to determine the value of an individual’s property. In the United States, individuals earn money for their labor and ideas. Individuals receive payment when they spend their time in a way that serves the interests of others.

Ideally, money is the common currency of value. When individuals engage in monetary transactions, they are exercising options. People add value by providing more options. In order to add options, people must engage in investment, which requires them to give up options. Investment is when people bet on a better future.

Fiduciaries are in charge of exercising people’s options between the present and future. This responsibility for tradeoffs between present and future options implies that fiduciaries have a responsibility to care for people’s economic interests.

Risk is people’s willingness to find themselves with no more options in the future. Fiduciaries need to respect people’s desire for risk, since preferences change over time. It is impossible to know what options will emerge and what people want, so fiduciaries must prioritize economic interests, increasing beneficiaries’ options.

Environmental, social, and governmental risk factors may place people’s future options at risk. For example, climate change or political instability could pose substantial threats to future economic prosperity. Social factors, such as rising inequality and declining economic mobility, could also threaten beneficiaries’ future options. Since fiduciaries have a responsibility to increase people’s future options, they have a responsibility to minimize ESG risk factors, while acting in beneficiaries’ economic best interest.

Currently, the United States Department of Labor requires that ERISA fiduciaries “may not select investments on the basis of any factor outside the economic interest of the plan.” Since ESG factors are externalities that pose risk to economic interests, ERISA fiduciaries should be allowed to select investments based on potential ESG returns.

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