They like ESG—to a point.
The Department of Labor made clear, somewhat, on Tuesday that plan sponsors, advisors and anyone else deemed a fiduciary may not (necessarily) put ESG over investment returns.
More specifically, the DOL’s Employee Benefits Security Administration released clarification on economically targeted investments, or those that supposedly generate positive social and environmental impact in addition to returns.
In its latest Field Assistance Bulletin (FAB), it warned that, “fiduciaries may not sacrifice returns or assume greater risks to promote collateral environmental, social, or corporate governance (ESG) policy goals when making investment decisions.”
Overall, it addressed issues that arise in the use of ESG-themed investment alternatives in 401k-type plans, and as qualified default investment alternatives.
“ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits,” EBSA said. “The FAB announced today advises that fiduciaries of ERISA-covered plans must avoid too readily treating ESG issues as being economically relevant to any particular investment choice.”
It further advised that ERISA does not necessarily require plans to adopt investment policy statements with express guidelines on ESG factors.
Finally, the FAB clarified that plan fiduciaries (including investment managers) may not routinely incur significant plan expenses to pay for the costs of shareholder resolutions or special shareholder meetings, or to initiate or actively sponsor proxy fights on environmental or social issues.
The latest bulletin follows DOL guidance from 2015 which seemed to encourage (or require) the consideration of ESG factors in ERISA-based retirement plans, calling them “tie-breakers” in fiduciary considerations.
It was largely interpreted to mean if two like investments were under review by investment managers for inclusion in a plan, and one had the added benefit of positively impacting ESG while the other did not, the former should be chosen.
The 2015 bulletin followed DOL guidance from 2008 that addressed certain ESG factors and how they affect investment returns; for instance, climate change on low-lying agricultural investments.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
This is sheer stupidity..what is going to happen in the near future is environmental stress tests in the financial industry. Bond investors will take a bath as the cost of carbon is factored into financial investments. As these bonds are adversely effected by the environment. To dumb it down for the public fannie, freddie and other mortgage bonds with a 30yr time horizon will go into default due to rising coastlines. As you skeptics need statistics there is now a 7% discount and the market is now descending on lower coastline properties. There is no environmental stress test yet…as we now all know wall street is asleep at the wheel and is now paying fines for their failure to recognize the falling credit quality of subprime mortgages. History repeats itself…The bond expert is now on national record documenting the near future…
Wall Street is not the only reason and actually the last important for the last bubble. In the mid nineties a bill was passed and signed by the then president to relax loaning standards for subprime borrowers. This was supposed to increase minority home ownership, but instead those who could not afford a a home were being approved. Since rates were kept so low thru the 90’s, which is very similar now where the housing market was out of control. The mistake Wall Street made was not honestly disclosing the assets and loan types in a large portion of the mbs because they were straight junk. The only way to completely prevent this from happening again is to get rid of MBS and have banks keep the loans on their books, which will result in the reduction in the number of loans. If you want to point fingers at those responsible, the first would be the consumers who took out these loans. 2nd, the mortgage brokers who sold the house and 3rd the president in the mid 90’s who signed this legislation. The DOL is correct when it says ESG is not an economic factor to be considered when investing retirement funds. If those securities follow the fund strategy and are the best investments, then and only then should these ESG assets be purchased for retirement accounts.