The U.S. Department of Labor on Oct. 21 reversed 2008 guidance that discouraged retirement plan fiduciaries and their investment advisers from considering environmental, social and governance (ESG) factors when choosing companies for their portfolios. The reversal, made through a new interpretive bulletin that reinstates 1994 guidance, recognizes a growing consensus that fiduciary duty may in fact require fiduciaries to look at these aspects to protect plan participants’ retirement accounts from undue risk.
DOL said in the new bulletin that it wanted to clarify that plan fiduciaries should appropriately consider any factors that potentially influence risk and return.
The October 2008 DOL Interpretive Bulletin 08-01 on Economically Targeted Investments (29 C.F.R. 2509.08-1) was seen as counseling retirement plan and other fiduciaries and professional investors to avoid taking into account so-called ESG factors when selecting plan assets. As a result, potentially billions of dollars of assets under management in the United States were diverted from companies that impartial investment research firms have found to have better ESG practices and scores.
New Bulletin Restores 1994 Language
The agency withdrew Interpretive Bulletin 08-01 in favor of Interpretive Bulletin 2015-01, which brings back the language of Interpretive Bulletin 94-01.
DOL defines ETIs as those selected for the economic benefits they create, in addition to the investment return to the employee benefit plan investor. It is heavily influenced by consideration of ESG factors at investment targets. Benefits plans governed by ERISA must put the plan’s financial returns and potential risk to its beneficiaries above all other considerations. Fiduciaries may not accept lower expected returns or take on greater risks in order to secure collateral benefits, DOL reminded in the new bulletin.
ESG factors can include companies’ approaches to greenhouse gas emissions, supply-chain issues, labor force treatment, political contributions and executive compensation, indigenous peoples and human rights controversies, among many other variables.
The new bulletin (29 C.F.R. Part 2509) stated that “fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.”
DOL said fiduciaries may invest in ETIs, including “socially responsible” mutual funds, based, in part, on their collateral benefits if the investment is “economically equivalent” to investments without such benefits. It further said it does not construe consideration of these investments and factors to require additional documentation or evaluation beyond that required by ordinary fiduciary standards for plan investments.
‘Unduly Discouraged Fiduciaries’
DOL said in its 2015 guidance that “in the seven years since its publication, IB 2008-01 has unduly discouraged fiduciaries from considering ETIs and ESG factors.” The agency also said some fiduciaries believed the 2008 guidance set a higher but unclear standard of compliance for them when they are weighing ESG factors or ETI investments.
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