Sustainable Investing and Fiduciary Obligations in Pension Funds: The Need for Sustainable Regulation

Investment practices can support sustainability efforts or undermine them. As one of the world's largest capital pools, pension funds have a particularly important role to play in sustainable investing practices. In this article, I examine the U.S. requirement that fiduciaries of private-sector pension plans must maximize financial returns without regard to the negative externalities those investments may create. Other countries, including South Africa, the original leader in sustainable pension investments, take a different approach. I make four major contributions in this article. First, I engage in a thorough literature review and identify the major strands of disagreement on whether U.S. fiduciaries may integrate ESG (environmental, social, and governance) factors into investment decision making. Second, I analyze whether the very different applications of fiduciary obligations (the implementing rules) on ESG investing in the United States and South Africa are attributable to the underlying legal systems. Comparison of common law and civil law shows that the underlying systems do not explain the differences in implementing rules. Third, I trace the source of the U.S. implementing rules to understand the motivations of the U.S. applications, and I do the same for South Africa. I determine that differences in the development of those rules provide the best explanation for their approaches. I conclude that legislative change is needed in the United States to provide stable guidance to U.S. pension plan fiduciaries. I offer a package of suggested reforms that could garner sufficient support for enactment.