Whenever the government issues “guidance” or “clarification” ready yourself for a mishmash of hodgepodge gobbledygook. So it is with Interpretive Bulletin 2015-01 which, when examined closely, has the tinfoil hat-wearing, black-helicopter crowd looking pretty reasonable.
Released on Oct. 26, the DOL’s bulletin sounds oh-so altruistic, which is probably the point. It sets forth new conditions regarding environmental, social and governance issues and their inclusion in pension fund investment platforms. It follows on DOL guidance from 2008 that addresses certain ESG factors and how they affect investment returns; for instance, climate change on low-lying agricultural investments. In keeping with incremental increases in regulatory oversight, 2008’s release was presented as mere “suggestions,” “considerations,” and “assistance,” or so investment managers thought.
“Most pension fund managers, who have a fiduciary responsibility to maximize returns, have assumed that such factors can act as a tie breaker, if all other things are equal,” writes former hedge-fund manager Andy Kessler in The Wall Street Journal Wednesday. “The thinking was: Thanks for the heads up about the climate, but leave the investing to us. Managers could still weigh other factors above climate change without getting sued.”
Note the last line. If two investments of varying risk and return were examined, and one somehow added value with regards to climate change (whatever that might be), it could be seen as obvious justification for inclusion in the portfolio, one that was voluntary at said manager’s discretion.
No longer. Get a load of the language in the new release:
“Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tiebreakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”
ESG ranks right up there with risk, return, alpha, beta and all the other parameters by which managers evaluate a potential investment in order to maximize the monetary outcome; not that they necessarily want to, now they have to.
“This government is essentially saying: Don’t you dare invest in anything that causes or is hurt by climate change, or you’ll be sued for failing your fiduciary responsibilities,” Kessler adds. “Energy, utilities and industrials are 20 percent of the market. How can pension funds now own any of them?”
Portfolio managers, especially those that currently occupy the ESG space by employing SRI and religious screens, took the DOL’s message as one meant to encourage so-called impact investing, which it will surely do. Yet with government demanding documents related to Exxon and other fossil fuel producers, calls from certain politicians to prosecute climate “deniers” and the upcoming U.N. conference on climate change in Paris, one has to wonder if something larger is afoot. Yes, it only covers pension fund managers (for now), but with all that’s happening on the fiduciary front, the release does little to settle 401(k) advisor angst and, by extension, the plan participants they serve.
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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.