Yifat Naftali Ben Zion

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. Read more here.

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