The Markets March 30, 2018

Paper Argues Green Bonds Can Help Investors Mitigate Risk Factors

"Based on our observations as managers of global fixed income portfolios, the integration of ESG factors and green bonds into the investment process can help investors reap opportunistic gains as well as defend returns,” Yvette Klevan with Lazard Asset Management says.

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Reports of environmental, social and governance (ESG) investing and new products tend to focus on the equity side of investing, but an Insights report from Lazard Asset Management argues there is value in investing in green bonds.

Yvette Klevan, managing director and portfolio manager/analyst at Lazard explains in her report that a green bond is a standard fixed income instrument whose proceeds are used to finance “green” or environmentally friendly projects. “This type of investment is compatible with an ESG framework (especially the environmental and social factors). In the past, investors have tended to focus more specifically on governance factors to better understand the risks and opportunities associated with lending to different entities. Today, however, instruments like green bonds are allowing investors to directly address the environmental and social aspects of their investments. Proceeds from green bonds issued to finance solar or wind projects, for instance, may also provide clean water, lessen pollution, and introduce a sustainable energy source to remote areas,” she says.

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Klevan adds that green bonds are particularly important to the clean energy, infrastructure, and transportation industries as they allow countries and companies to obtain funding to achieve positive and sustainable environmental and social goals. “Ultimately, we believe that an active and tactical approach to investing in green bonds may allow investors to better manage risk factors, such as those relating to currencies and rates,” she says.

According to the report, demand for green bonds is surging. Green bond issuance has steadily increased since 2007 and is expected to surpass $250 billion in 2018.

Green bond principles and investment opportunities

Rules continue to emerge to govern the nascent green bond sector, according to Klevan, who notes that the Green Bond Principles (GBP) are currently the most well-established framework for evaluating these instruments. The GBP were developed by the International Capital Markets Association and have four components: use of proceeds, process for project evaluation, management of proceeds, and project reporting. These are voluntary guidelines and the determination of what constitutes a green bond is still left to the issuers and underwriters.

Moody’s constructed a methodology to assess the environmental credentials of issuers. Its framework evaluates the issuer’s approach to managing, administering, allocating, and reporting on the projects financed by green bonds, and produces a composite grade ranging from “Excellent” (GB1) to “Poor” (GB5). The use of proceeds carries the largest weighting (40%) in their score. S&P also launched a Green Evaluation Tool to score green projects according to the quality of governance, transparency of a transaction, and the environmental impact associated with the project.

As for choosing green bond investments, Klevan says the Bloomberg Barclays MSCI Global Green Bond Index draws heavily from the GBP and has a stated aim to offer investors an objective, robust measure of the green bond market.

“As society focuses on reducing its carbon footprint, we believe portfolios that recognize this secular trend and proactively reduce their carbon exposure may be better positioned to outperform the broad market. We believe an investment approach that emphasizes sustainability is better placed to add value in the long run. Based on our observations as managers of global fixed income portfolios, the integration of ESG factors and green bonds into the investment process can help investors reap opportunistic gains as well as defend returns,” Klevan concludes.
Compliance March 30, 2018

Court Denies Motion to Dismiss Edward Jones Self-Dealing Suit

U.S. District Judge John A. Ross noted in his order that the arguments the defendants advance in support of dismissal are virtually identical to those raised in their original motion which was rejected by the court and, absent a new argument, he is led to the same conclusion not to dismiss the suit.

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In a case accusing Edward Jones of favoring its own investments and those of its “preferred partners” in its 401(k) plan, at the expense of performance, a federal district court has denied the company’s motion to dismiss.

The defendants, which included Edward D. Jones & Co., L.P., the Jones Financial Companies, L.L.L.P., the Edward Jones Investment and Education Committee and individual fiduciaries serving the plan, are also accused of causing the plan to pay excessive recordkeeping and plan administration fees to the recordkeeper, Mercer HR Services, Inc.

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According to a new order denying dismissal of the suit, the motion to dismiss the original complaint was also denied, although the court removed the Jones Financial Companies, L.L.L.P. as a defendant because the complaint failed to allege any facts establishing it was a plan fiduciary.

After an amended complaint was filed, Edward Jones moved to dismiss all claims relating to the inclusion in the plan lineup of three investment options referred to as the Edward Jones Plan Portfolios (the Edward Jones Growth Fund, the Edward Jones Growth and Income Fund, and the Edward Jones Income Fund) for failure to state a claim for breach and as time-barred under the Employee Retirement Income Security Act’s (ERISA’s) statute of limitations; Count II of the Complaint as to the investment committee for failure to allege that the committee had any involvement in the selection or oversight of the plan’s recordkeeper; and the claims asserted by one plaintiff because she was not a plan participant and thus lacked standing. In response to the defendants’ motion, the plaintiffs amended their complaint by replacing the one plaintiff with another; removing allegations concerning the three Edward Jones managed mutual funds; and adding the Edward Jones Profit Sharing and 401(k) Administrative Committee and its members as defendants.

The defendants have moved to dismiss the new complaint, arguing that the plaintiffs have failed to plausibly allege a breach of fiduciary duties and failed to state a claim as to the Administrative Committee and the Investment Committee. While the defendants acknowledge that their arguments in support of dismissal (with the exception of their argument that the plaintiffs have improperly conflated their allegations as to the Administrative and Investment Committees) are similar to the arguments previously raised by the Edward Jones entities named in the original complaint and rejected by the court, they assert that because of the new parties (both the plaintiffs and the defendants), it is appropriate for the court to consider once more their challenges to the legal sufficiency of the new complaint.

U.S. District Judge John A. Ross noted in his order that the arguments the defendants advance in support of dismissal are virtually identical to those raised in their original motion and, absent a new argument, he is led to the same conclusion not to dismiss the suit.

However, the defendants argued that the law has continued to develop in this area since the court’s previous dismissal of their motion to dismiss, and cite Meiners v. Wells Fargo & Co. in support of their current motion. In Meiners, the court held that the plaintiff’s breach of fiduciary duty claim, premised on allegations that the 401(k) plan invested in twelve proprietary funds with excessive fees, “merely allege[d] that [the defendant] failed to invest in the cheapest fund available.” Without pleading “something more,” such as allegations that the fees were excessive as compared to the average cost of similar-sized plans or that the fees were higher than the median fees for comparable funds, the court explained that the plaintiff’s claim was not plausible and dismissed it. The defendants argue that as in Meiners, the plaintiffs have failed to “plead additional facts showing that the fiduciary’s decision was based on financial interest rather than a legitimate consideration,” or suggesting that the choice of higher-cost affiliated funds was the result of flawed decision-making.

However, according to Ross’ order, the plaintiffs distinguish Meiners by pointing to their allegations that Mercer’s fees nearly tripled over the class period; that market rates for recordkeeping services declined throughout the class period; that the total weighted average expense ratio of the plan was high compared to market rates; and that the defendants failed to prudently monitor and control compensation to Mercer in light of the services provided. The plaintiffs also allege that the defendants’ policy of distributing revenue sharing payments to the plan was not adopted until 2016. Ross said these facts are sufficient to raise an inference of disloyalty and imprudence. He also pointed to several recent cases that have rejected similar arguments to dismiss claims asserting ERISA fiduciary breaches against 401(k) plan fiduciaries

In addition, Ross found that the plaintiffs have sufficiently detailed and differentiated the claims asserted against the Administrative Committee and the Investment Committee. “The amended complaint is far from a ‘kitchen sink’ or ‘shotgun’ pleading in which a plaintiff brings every conceivable claim against every conceivable defendant, resulting in a cause of action so general that it fails to put the various defendants on notice of the allegations against them,” he wrote.

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