Unintended Consequences of ESG

The unintended consequences of investing according to environmental, social and governance principles

Darshak S. Dholakia, Jeremy B. Zucker and Julien Bourgeois, Dechert
Originally published in the August 2019 issue

Institutional investors, asset managers and others in the financial services industry are increasingly adopting environmental, social and governance (“ESG”) investment principles to attract and retain business from socially conscious investors. European institutions have historically been at the forefront of ESG-based investing, but a growing number of US and other global institutions are formally incorporating these principles into their business models.

Also referred to as “socially responsible investing” or “sustainable, responsible and impact investing” (“SRI”) principles, these initiatives often are motivated by a laudable desire to raise the profile of ethical considerations in business. The implementation of ESG criteria should be undertaken with care, however, as their use can have unintended consequences depending on the specific criteria that underlie an institution’s approach to ESG investing. For example, US institutions and even non-US institutions that have US public clients (e.g., state pension funds) that are considering leveraging well-known ESG criteria used by European institutions should be aware of potential issues under US federal and state antiboycott measures that penalize entities that refuse to transact with or invest in Israel and Israeli companies. Issues also can arise under US federal and state laws that authorize or require divestment of investments in companies that have operations in Iran and Sudan.

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