A new interpretive bulletin (2015-01) issued today by the Department of Labor clarifies their position that investment decisions that take into account “collateral considerations” (such as an environmental or social policy) are acceptable under ERISA, provided they do not subordinate the financial interests of plan participants. This bulletin makes it easier for ERISA-based plans to adopt ESG policies.
Back to the future past
First of all, a brief summary of the change. For full details, interested readers should refer to the bulletin itself—but the key change lies in the withdrawal of a 2008 position on this subject, and the reinstatement of some language from an even earlier statement (dating from 1994.) This was done because the 2008 version is seen as “unduly discouraging” economically targeted investments.
The specific parts of the 2008 bulletin that were having that effect were (a) that it was read by some as saying that collateral considerations were not permissible even as a tiebreaker between two investments that were economically equivalent (i.e. that were judged as having the same return and risk expectations) and (b) that there was a higher (but unclear) standard of compliance for fiduciaries when making ESG investments.
So the new bulletin withdraws the 2008 position.
Financial interests must not be compromised
It continues to be the case that the financial interests of plan participants must not be compromised by an ESG policy. But collateral considerations are not necessarily going to be presumed to be harmful. As my colleague Leola Ross puts it: “It remains clear that the financial interests of the plan participants are the primary objective. And with that objective clear, other considerations are permissible”.
So this bulletin enables plans to move ahead with ESG considerations if they choose to do so, but does not require any action from those who prefer to avoid this sort of thing. Really, the new position can be seen as taking the thumb off the scale by removing some artificial barriers to ESG, rather than imposing any new requirements on fiduciaries.
I have argued in the past that the five tests that a fiduciary should consider when putting together any form of responsible investment policy are:
- what is the impact on the expected level of investment return?
- what are the risks associated with the policy?
- how will the policy be implemented?
- does the policy have broad stakeholder acceptance?
- is the policy properly documented?
Those five tests seem to continue to be a sound framework for those who would like to move forward in this area.
A sign of the times
ESG, of course, continues to gain higher profile among institutional investors. With better analytical tools now available, it’s possible to look at ESG measures through a purely financial lens (as has been done in some recent work by Leola Ross.) There are several ways in which ESG considerations can be now built into portfolios. In many ways, ESG is simply becoming mainstream.