New Paper from Harvard Confirms Investment Laws are Absurd

Rick had the opportunity to attend the Institute for Law and Economics Fall Roundtable at Penn Law, which focused on a variety of sustainability issues.  Max M. Schanzenbach, of Northwestern Law delivered a paper he co-authored with Robert H. Sitkoff of Harvard Law.  The paper was titled Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee.

Rick’s thoughts and comments can be read below.


A Pension Trustee Must Consider Only Profits

The bottom line of the paper was that under US law, fiduciary duty and conscience cannot be reconciled: Professor Schanzenbach explained that pension funds, 401(k) plans and similar trusts are governed by the “sole beneficiary rule,” which prevents trustees from considering any matter other than financial return to shareholders.  The rule is very strictly construed; for example, if two investments are completely equal from a financial perspective, the paper states that a trustee cannot “break the tie” based on the fact that one investment will be better for workers or the environment. Nor could a trustee vote shares in a company in favor of shareholder resolutions that suggested reducing carbon emissions for reasons other than increasing financial return, even if the trustee believed that such reduction would improve the lives of the workers whom the trust was intended to benefit.

In other words, the paper finds that no matter what the cost to our planet and its inhabitants, the law requires that the trillions of investment dollars entrusted to trustees must be devoted to maximizing financial return, no matter the real cost to our planet and the people who live on it.


The Difficulty of Pursuing Responsible Profits

The paper concedes that sometimes a trustee can pursue returns by applying social and environmental lenses to investing (such as divesting from oil companies to avoid the risk of “stranded assets”). However, the implicit message of the article is that even this is risky for a trustee, who must be able to prove that she was pursuing only financial gain, and not trying to save the planet (for which she might be found personally liable.)

This is a Problem

While some may argue that the article gets some of the law wrong, it is clear that many trustees believe their duties may be circumscribed in this fashion and worry that doing anything that might seem altruistic should be avoided.

Let me try and be clear: THIS IS NUTS!

Yes, retirees want to save enough for a good retirement; but they cannot do so if companies compete by poisoning our food chain and depriving the government of revenue or engaging in other practices that damage our national and global commons. Moreover, they will not be able to enjoy their riches in a planet of refugees, flooded coasts and crumbling infrastructure.  But even putting aside their own long-term interests, I doubt that many savers are interested in squeezing the last nickel out of an investment by employing children to sew clothes in firetraps. However, this is apparently precisely what the sole beneficiary rule requires.

One of the things I asked staffers about during our visit to the Hill was whether we could change the federal laws governing pension plans and actually reconcile our humanity and our investing strategy.  If this is important to you, and if you want to help make change, please email me. In the months to come, I hope to be able to report that we are making progress, and that the system can be altered to ensure that trustees need not act like sociopaths in order to do their job.

From The Shareholder Common’s December 2019 Newsletter. Sign up for our newsletter here to get more updates from TSC on our work, research, and opportunities for action.