The Law and Economics of Environmental, Social, and Governance Investing by a Fiduciary

57 Pages Posted: 6 Sep 2018 Last revised: 9 Jan 2019

Date Written: September 5, 2018


The use of environmental, social, and governance (ESG) factors in investing is increasingly common and widely encouraged by investment professionals and non-government organizations. However, trustees and other fiduciary investors in the United States, who manage trillions of dollars, have raised concerns that using ESG factors violates the fiduciary duty of loyalty. Under the “sole interest rule” of trust fiduciary law, a trustee or other investment fiduciary must consider only the interests of the beneficiary. Accordingly, a fiduciary’s use of ESG factors, if motivated by the fiduciary’s own sense of ethics or to obtain collateral benefits for third parties, violates the duty of loyalty. On the other hand, some academics and investment professionals have argued that ESG investing can provide superior risk-adjusted returns. On this basis, some have even argued that ESG investing is required by the fiduciary duty of care. Against this backdrop of uncertainty, this paper examines the law and economics of ESG investing by a fiduciary. We differentiate “collateral benefits” ESG from “risk-return” ESG, and we provide a balanced assessment of the theory and evidence from financial economics about the possibility of persistent, enhanced returns from risk-return ESG.

We show that ESG investing is permissible under trust fiduciary law only if two conditions are satisfied: (1) the fiduciary believes in good faith that ESG investing will benefit the beneficiary directly by improving risk-adjusted return, and (2) the fiduciary’s exclusive motive for ESG investing is to obtain this direct benefit. We reject the claim that the law imposes any specific investment strategy on fiduciary investors, ESG or otherwise. We also consider how the law should assess ESG investing by a fiduciary if authorized by the terms of a trust or a beneficiary or if it would be consistent with a charity’s purpose, clarifying such cases by asking whether a distribution would have been permissible under similar circumstances.

Keywords: Truste, trustee, prudent investor rule, ESG, environmental social and governance, law and economics, law and finance, trust, pension, charity, endowment, active investing, active shareholding, contrarian investment, SRI, socially responsible investment, ethical investing, sustainable investing, impa

JEL Classification: K22, G11, G14, G18,

Suggested Citation

Schanzenbach, Max Matthew and Sitkoff, Robert H., The Law and Economics of Environmental, Social, and Governance Investing by a Fiduciary (September 5, 2018). Northwestern Law & Econ Research Paper No. 18-22. Available at SSRN: or

Max Matthew Schanzenbach

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

Robert H. Sitkoff (Contact Author)

Harvard Law School ( email )

1575 Massachusetts Avenue
Cambridge, MA 02138
United States
(617) 384-8386 (Phone)
(617) 812-6195 (Fax)


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