February 22, 2013
Divestment can be a Fiduciary Duty
by Robert Kropp
Adam Kanzer of Domini Social Investments that divestment of holdings in firearms manufacturers is
an appropriate response to tragedies such as the killing of children in Newtown.
Sustainable investors have a number of tools with which to influence the behavior of companies in
their portfolios. Data compiled by the Interfaith
Center on Corporate Responsibility (ICCR) on the engagement practices of its members indicates
that in the last two years, corporate dialogue has become a more frequent practice than the filing
of shareowner resolutions.
But as long as the global economy continues to hurtle
along on its unsustainable path, the filing of shareowner resolutions will continue. "While some
resolutions represent ongoing requests to management, often re-filed over several years with
increasing shareholder support, others are a direct response to a company's 'irresponsibility' on a
specific issue, or other emerging events," according to ICCR's recently published 2013 Proxy
Resolutions and Voting Guide.
Divestment is another potential shareowner action, although
one considered by many institutional investors as a last ditch effort. After all, the ability of
shareowners to influence corporate behavior effectively ends when they no longer hold shares in a
company. But as Cary Krosinsky, now the Executive Director of the Network for Sustainable Financial Markets
(NSFM) and lead editor of Evolutions in Sustainable Investing, told SocialFunds.com in 2010,
"Divesting is a powerful tool, and if you don’t use it enough you don’t have it in your toolbox."
And there have always been specific industry sectors excluded by most sustainable
investors from their portfolios. While engagement with tobacco companies may lead them to improve
their policies on marketing to children, for instance, the only way for a tobacco company to
observe the Guiding Principles on Business and Human Rights and respect human rights is to stop
producing tobacco products.
The debate over the merits of divestment has flared up again
in the wake of the recent horrific shootings of children in Newtown, CT. Days after the shootings,
the California State Teachers' Retirement System
(CalSTRS), one of the largest public pension funds in the world, launched a review of its
holdings in Cerberus Capital Management, a private equity fund that had invested in a firearms
manufacturer. Cerberus subsequently announced it had begun the process of divesting its holdings in
the Freedom Group.
"These funds should never have been invested in gun makers in the first
place," Adam Kanzer, managing director and general counsel of Domini Social Investments, wrote in a recent commentary published
at Pensions & Investments. "But that is a
very poor argument for taking no action now."
Kanzer was writing in response to an
editorial from the publication, entitled Misdirected Furor, which features a cartoon depicting
pension funds that consider social issues in their investment strategies as lemmings following each
other off a cliff. "Divesting is a misguided reaction," the editorial states. "Pension fund
trustees are fiduciaries; their plans are not agents of social change."
follows a statement from a spokesperson for the Vanguard Group, one of the nation's largest fund
families, who argued that mutual funds "are not optimal agents to address social change."
In response to the statement from Vanguard, Robert Zevin of Zevin Asset Management told National Public Radio, "States have a
huge interest in reducing gun ownership and gun violence, and to begin to codify that by first
divesting before pursuing other avenues such as legislation and even lawsuits against companies."
Furthermore, Zevin observed, "Almost all of the criteria that social investors have
applied have not interfered with optimizing or maximizing returns."
According to Kanzer,
the Pensions & Investments editorial "is based on several well-worn misconceptions about social
investing and fiduciary duty."
"The foundational myth is the notion that 'social' issues
are unrelated to financial return and must therefore be ignored by fiduciaries," Kanzer wrote.
"This myth was put to rest ages ago by the performance of the MSCI KLD 400 Social index."
Citing the groundbreaking Freshfields
report of 2005—which concluded that the integration of environmental, social, and corporate
governance (ESG) considerations into investment decision making is not only permitted by law, but
in some cases may be required—Kanzer wrote, "The debate has moved on from the artificial,
bifurcated view of reality that views the investment portfolio in isolation from the real world. A
modern fiduciary must understand how the corporation affects the health of the systems upon which
it depends for its long-term survival."
Fiduciary II, the 2009
follow-up to the Freshfields report, went even further than its predecessor. "Advisors to
institutional investors have a duty to proactively raise ESG issues within the advice that they
provide, and that a responsible investment option should be the default position," the report
stated. "ESG issues should be embedded in the legal contract between asset owners and asset
managers, with the implementation of this framework being governed by trustees via client
Noting that the marketing strategies of firearms companies increasingly focus
on getting guns into the hands of children, Kanzer wrote, "This is your return on investment:
children touting semiautomatic weapons."
"Finance lacks clear imperatives to maximize life
and the priceless things that sustain it, such as clean air and water," he observed. "Finance knows
no imperative to safeguard children."
However, he argued, the responsibility of
fiduciaries extends beyond merely maximizing profits to include "the process of prudent
decision-making in conformance with a duty of loyalty."
"If you use my money to make a
weapon that kills my child, don't tell me that in 20 years I'll retire with more money as a
result," Kanzer wrote. "If you claim that decision was made in my best interest, you have no right
to call yourself a fiduciary."