First Environment is pleased to share a recent publication by several of our staff which addresses the growing importance and fundamentals of environmental, social, and governance (ESG) investing. Authored by Dr. Phillip Ludvigsen, Joshua Heltzer, and Arthur Clarke, the article was featured in the September issue of New York State Bar Association’s (NYSBA’s) peer-written publication, The New York Environmental Lawyer. A complete copy of the article is attached below.

 

As generally understood, ESG encompasses: environmental considerations covering “how companies manage their impact on the environment and how they mitigate environmental risks, such as climate change and resource shortages”; social considerations covering “the impact of company operations on labor, human rights, and other aspects of society”; and governance considerations covering “structures and processes that companies use to direct and manage their operations” including “relationships between management, directors, shareholders and other stakeholders.” Although seemingly new, ESG investing has an interesting history.

 

The application of various ESG factors to investment decisions can be traced back to socially responsible investing (SRI) in the 1980’s. This investment approach was largely driven by negative screening (exclusion of “sin stocks”) and activist “buy-side” demand. Pioneers in this area included asset managers such as Trillium Investments and Domini Investments. This “do-no-harm” investment approach expanded over the decades to include performance edge investing that looks to enhance returns through positive screening (“doing well by doing good”). Leaders in this area included Innovest Strategic Value Advisors and Generation Investment Management. These practices have evolved to include systematic ESG analysis with the goal of producing a measurable positive impact. This approach is sometimes called Impact Investing.

 

ESG investing, like all investing, involves a basic risk versus reward equation. The risks and rewards, however, can be different from typical investment practices that focus on only economic considerations. ESG investing also raises several legal and ethical considerations. For example, how does an ESG charter square with an asset manager’s fiduciary responsibility to maximize returns while minimizing risks? Financial accounting to assess investment returns is well established and straight forward. However, assessing and minimizing ESG related risks, especially those related to the broader public good, is quickly evolving and becoming more complicated.

 

This article presents the status of efforts to foster a mature ESG investment market. Despite these efforts, clear definitions and reporting standards have yet to emerge. This lack of clarity has resulted in potential risks and liabilities to market participants. For example, downside risks associated with greenwashing, misrepresentation or performance exist for issuers or obligors of debt or equity instruments that are purposefully or explicitly underpinned by ESG considerations, attributes or claims.

 

First Environment is well-positioned through our specialized knowledge, skills, and experience to assist lawyers in bringing clarity and valuable risk management insight to their clients through the capitalization of upside opportunities and protection of their interests in the wide-ranging ESG realm. For more information on our services, contact us.

 

Download our full article with citations.

 

Reprinted with permission from: The New York Environmental Lawyer, 2021, Vol. 41, No. 1, published by the New York State Bar Association, One Elk Street, Albany, New York 12207 | NYSBA.ORG