The Markets March 24, 2015

ESG Criteria Important for Majority of Investors

A majority of institutional investors consider ESG criteria when making alternative investment allocations, according to research by LGT Capital Partners and Mercer.
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Chief investment officers, heads of asset classes and portfolio managers all recognize the positive effects of environmental, social and governance (ESG) integration on risk-adjusted returns, according to Tycho Sneyers, managing partner and chairman of LGT Capital Partners ESG Committee.

Research reveals the majority of institutional investors actively consider ESG criteria when making alternative investment allocations. Sneyers believes ESG analysis has moved beyond ethical concerns and has firmly found its place as a risk and investment management topic. A survey by LGT Capital Partners and Mercer shows most institutional investors are confident that ESG improves risk-adjusted returns and is an important aspect of risk and reputation management.

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The survey analyzes 97 institutional investors in 22 countries. Research into why and how these investors incorporate ESG considerations in alternative asset classes reaches four key conclusions:

  • More than three-quarters of respondents incorporate ESG criteria when investing in alternative asset classes.
  • More than half (57%) believe incorporating ESG criteria has a positive impact on risk-adjusted returns. A mere 9% think it lowers returns.
  • Regarded with significance are issues with the potential to impact a company’s long-term risk, reputation or overall performance. Topics garnering strong support include carbon intensity, controversial weapons and bribery and corruption, while exclusionary criteria such as alcohol or tobacco are rarely considered.
  • Among the institutional investors who incorporate ESG criteria into investment decision-making, 54% have done so for three years or less. This suggests rising expectations for investment managers over time, as well as a need for greater clarity on techniques and strategies for ESG incorporation to help investors progress more quickly.

“It is encouraging to see investors becoming increasingly aware of the potential risks and opportunities these issues can present to portfolios,” says Deb Clarke, global head of investment research at Mercer. “Incorporating ESG considerations into investment decisions strengthens a portfolio’s defense against risks arising from governance failures, changes in policy and regulation, and environmental and social trends. It can also put investors in a better position to take advantage of opportunities arising from a shift towards more sustainable economic growth.”

More information about the “Global insights on ESG in Alternative Investing” research is available here.

Compliance March 24, 2015

Oral Misrepresentation Enough to State a Claim Under ERISA

A pension plan participant who claims he didn’t receive promised credit for service can proceed with his lawsuit. 
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A federal court has rejected Munich Reinsurance America’s argument that a lawsuit against it should be dismissed because the plaintiff only asserts informal oral representations as amendments to its pension plan and not Employee Retirement Income Security Act (ERISA) plan documents.

Richard Lees was hired by Munich’s predecessor, American Re-Insurance Company. From approximately October 28, 1996, through August 15, 1999, Lees worked for American but was paid by “an entity known as SMS.” In June 1999, American sought to transfer Lees from SMS’s payroll to American’s, and he advised the firm that he would agree to the transfer if it agreed to treat his time on the SMS payroll as time on the American payroll for the purpose of his pension benefits. According to the court opinion, human resource employees of American advised Lees that the firm would do so.

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U.S. District Judge Michael A. Shipp of the U.S. District Court for the District of New Jersey granted Munich’s motion to dismiss the claim that the pension plan committee’s decision to deny Lees credit for his previous service was “arbitrary and capricious” because Lees did not provide facts to support that claim. However, considering the claim that Munich violated its fiduciary duties under ERISA by not adhering to the oral agreement to give Lees credit for his previous service, Shipp found nothing in 3rd U.S. Circuit Court of Appeals precedent excludes oral misrepresentations from ERISA’s reach to support a breach of fiduciary duty claim.

Shipp noted in his opinion that a claim under ERISA for breach of fiduciary duty requires proof that the defendant was acting in a fiduciary capacity; the defendant made affirmative misrepresentations or failed to adequately inform plan participants and beneficiaries; the misrepresentation or inadequate disclosure was material; and the plaintiff detrimentally relied on the misrepresentation or inadequate disclosure.

Looking at 2nd Circuit precedent, Shipp found that in Ladouceur v. Credit Lyonnais, the 2nd Circuit held that oral representations purporting to change an employee pension benefits plan did not support an employees’ breach of fiduciary duty claim under ERISA. However, at the motion to dismiss stage, the appellate court vacated a district court’s dismissal and remanded for further proceedings “on the ground that plaintiffs had alleged facts sufficient to support their claims, and that further discovery might reveal a sufficient writing.”

Shipp determined that Lees alleges sufficient facts to support a breach of fiduciary claim, and further discovery into his employee file may reveal additional written materials to support his claim.

The opinion in Lees v. Munich Reinsurance America is here.

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