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.