Socially Responsible Investing: Law and Legal Ethics

1. Socially Responsible Investing:Law and Legal Ethics Marc Jackowitz – UBS C. Carter Ruml – Wyatt Tarrant & Combs, LLP June 16, 2010

2. Current Kentucky Fiduciary Law • KRS 386.800(3) "Prudent man" means a trustee whose exercise of trust powers is reasonable and equitable in view of the interests of income or principal beneficiaries or both, and in view of the manner in which men of ordinary prudence, diligence, discretion, and judgment would act in the management of their own affairs.

3. Other States’ Law:Uniform Prudent Investor Act • Not adopted in Kentucky yet • Section 5 – Loyalty“The trustee shall invest and manage the trust assets solely in the interest of the beneficiaries.”

4. Comments to Uniform Prudent Investor Act • No form of so-called “social investing” is consistent with the duty of loyalty if the investment activity entails sacrificing the interests of trust beneficiaries – for example, by accepting below-market returns – in favor of the interests of the persons supposedly benefitted by pursuing the particular social cause…. Commentators supporting social investing tend to concede the overriding force of the duty of loyalty. They argue instead that particular schemes of social investing may not result in below-market returns. In 1994 the Department of Labor issued an Interpretive Bulletin reviewing its prior analysis of social investing questions and reiterating that pension trust fiduciaries may invest only in conformity with the prudence and loyalty standards of ERISA §§ 403-404. The Bulletin reminds fiduciary investors that they are prohibited from “subordinat[ing] the interests of participants and beneficiaries in their retirement income to unrelated objectives.”

5. How Can SRI Reduce Fiduciary Liability Risks? • Governance • Avoiding catastrophic environmental or other tort liabilities • This concern weighs differently with SRI for individual stocks vs. SRI funds • Catastrophe avoidance benefits are lessened if you’re already diversified, leaving possible SRI performance differential (better or worse) as the remaining issue

6. How Could SRI Increase Fiduciary Liability Risks? • Sector overweightings or underweightings • Reduced profit margins • Possibly enhanced risk for SRI mutual funds rather than individual issues…

7. Best SRI Practices for Kentucky Fiduciaries • Focus on governance SRI measures • Focus on executive compensation • Contrast strictly labor/environmental/social justice metrics • Seek releases from beneficiaries • Full disclosures of SRI risks and benefits • Separate representation of beneficiaries when negotiating release • Administer trust as separate shares • Under trust instrument • Petition District Court to divide into separate shares, if trust doesn’t so provide

8. SRI – Ethical Considerations for Attorneys • SCR 3.130(2.1) “In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.”

9. SRI – Ethical Considerations for Attorneys • SCR 3.130(1.7)(a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. (b) Notwithstanding paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing. The consultation shall include an explanation of the implications of the common representation and the advantages and risks involved.

10. SRI – Ethical Considerations for Attorneys • SCR 3.130(1.7) – Comment 27 (estate planning and administration) “For example, conflict questions may arise in estate planning and estate administration. A lawyer may be called upon to prepare wills for several family members, such as husband and wife, and, depending upon the circumstances, a conflict of interest may be present. In estate administration the identity of the client may be unclear under the law of a particular jurisdiction. Under one view, the client is the fiduciary; under another view the client is the estate or trust, including its beneficiaries. In order to comply with conflict of interest Rules, the lawyer should make clear the lawyer's relationship to the parties involved.”

11. SRI – Ethical Considerations for Attorneys • SCR 3.130(1.7) – Comment 28 (representation of parties in negotiations) “Whether a conflict is consentable depends on the circumstances. For example, a lawyer may not represent multiple parties to a negotiation whose interests are fundamentally antagonistic to each other, but common representation is permissible where the clients are generally aligned in interest even though there is some difference in interest among them. Thus, a lawyer may seek to establish or adjust a relationship between clients on an amicable and mutually advantageous basis; for example, in helping to organize a business in which two or more clients are entrepreneurs, working out the financial reorganization of an enterprise in which two or more clients have an interest or arranging a property distribution in settlement of an estate. The lawyer seeks to resolve potentially adverse interests by developing the parties' mutual interests. Otherwise, each party might have to obtain separate representation, with the possibility of incurring additional cost, complication or even litigation. Given these and other relevant factors, the clients may prefer that the lawyer act for all of them.”

12. SRI – Ethical Considerations for Attorneys • KBA Ethics Advisory Opinion E-401 “In representing a fiduciary the lawyer’s client relationship is with the fiduciary and not with the trust or estate, nor with the beneficiaries of a trust or estate.” “A lawyer has a duty to advise multiple parties who are involved with a decedent’s estate or trust regarding the identity of the lawyer’s client, and the lawyer’s obligations to that client. A lawyer should not imply that the lawyer represents the estate or trust or the beneficiaries of the estate or trust because of the probability of confusion.”

13. BP – SRI Case Study

14. BP – SRI Case Study • 8/1/2006 BP, Suncor, and Shell Top Oil Sector Sustainability Rating; Chevron and ExxonMobil Rank Low by Bill BaueThe report by Jantzi Research examines 23 oil companies worldwide on environmental issues such as greenhouse gas emissions as well as human rights and other social issues.  SocialFunds.com -- Oil and gas companies have been fueled by record profits and strong investment returns recently--and are continuing to be exposed to social and environmental risks. These "above ground" issues, as they are called by some energy companies, are increasingly understood as having material impacts on financial performance by mainstream investors. So implementing best practice to address social and environmental issues is not merely an ethical statement by oil and gas companies to appeal to social investors, but also a financially savvy risk management strategy attractive to more conventional investors as well.Toronto-based socially responsible investing (SRI) research firm Jantzi Research recently released a report entitled Oil and Gas in a Bull Market: The Shifting Sands of Responsibility that rates and ranks 23 oil and gas companies on their social and environmental performance. UK-based BP (ticker: BP) topped the list with a score of 6.8 (out of 10), with second through fourth places going to Canada-based Suncor Energy (SU--6.5), Nexen (NXY--6.3), and Petro-Canada (PCZ--6.1) respectively, and UK-based Shell (RD--6.0) rounding out the top five. Source: Christian Brothers Investment Services, Inc.

15. BP – SRI Case Study In an April 2009 profile of BP, RiskMetrics analyst Yulia Reuter summed up the direct costs of its health, safety and environmental practices: • The Texas City refinery explosion in 2005, an additional fatality at the same refinery in January of 2008, OSHA safety fines levied on the Toledo refinery in 2005, and spillages in Prudhoe Bay caused by pipeline corrosion in 2006, revealed major operational issues, which cost the company approximately $10 billion, or 40% of 2007 cash flow from operations. • Following the Texas refinery accident in 2005 that killed 15 and injured 180 workers, the Occupational Safety and Health Administration has fined BP a record $21.4 million and prompted a criminal conduct investigation. In February 2009, under the Clean Air Act in the US, the company was ordered to spend $161 million on pollution controls, pay a $12 million civil penalty, and spend $6 million on a supplemental project to reduce air pollution in Texas City. • This follows $50 million in criminal penalties imposed in October 2007 for the Clean Air Act violation in connection with the 2005 explosion. BP has also established a $2.1 billion provisional fund related to the incident and increased spending to $1.7 billion a year over the four-year period from 2007 to 2010, in order to improve the integrity and reliability of its US refining assets. To be sure, the extraction and refining of petroleum is an inherently dangerous process. But comparative research of the sector’s environmental, social and governance (ESG) performance shows that BP’s safety record lags its peers. RiskMetrics IVA analysis assigned the firm a Health & Safety score below the sector average. Source: http://blog.riskmetrics.com/esg/2010/04/bp-spill-safety-record.html