Ethical Investments: Correcting ERISA’s Misinterpretation

The market for socially responsible investing—commonly referred to as ESG (environmental, social, and governance) investing—is experiencing rapid growth. Yet a crucial question, that could shape this market’s potential to better our world, remains unresolved: can institutional investors consider ESG factors when making investment decisions? These investors hold a significant portion of global corporate equity, currently valued in the trillions of dollars. Consequently, they stand in a unique position from which they can influence the actions of corporations. But institutional investors also manage other people’s money, which binds them to fiduciary duties that govern their investment decision-making. Do these duties prevent institutional investors from considering ESG factors? The Department of Labor attempted to resolve this controversy with a rule published in January of 2023, arguing that fiduciary law, as expressed in the ERISA regulation, does not necessarily exclude investments based on collateral benefits. However, this interpretation has sparked ongoing legal and academic debates. A recent and highly influential scholarly account claims that fiduciary law mandates institutional investors to act solely in the direct financial interest of their clients. As ESG considerations may extend well beyond that, this position significantly limits ESG’s scope. This Article contends that such a narrow interpretation of fiduciary law is fundamentally flawed. Through an analysis of numerous cases as well as private law theories, the Article demonstrates that this restrictive legal stance misreads U.S. Supreme Court decisions and lacks compelling justification. Properly interpreted, fiduciary law does not constrain ethical investments; rather, it can and should support the critical need of our time: funding corporations that contribute to social welfare.