ESG Considerations for ERISA Fiduciaries: Fi360 Annual Conference

The industry and investors must be careful about how they use different terms and categories

401k, ESG, retirement, Fi360The ESG outlook isn't always so clear.

ESG investing is a lot like derivatives. It can be immensely additive and helpful from a return and competitive standpoint, but also incredibly harmful if not understood.

So began George Michael Gerstein, counsel with legal powerhouse Stradley Ronon, in a session entitled “ESG Considerations for ERISA Fiduciaries” at the Fi360 Annual Conference Thursday afternoon in San Diego.

Referencing the DOL’s Field Assistance Bulletin released on Monday, he pointed to the varying phrases it contained, including ESG, SRI, impact investing and economically targeted investments (ETI).

“They all mean different things with different legal ramifications and responsibilities, and it’s not just semantics,” Gerstein noted.

He asked co-panelist Alexandra Caffrey, portfolio manager with Envestnet, for a definition of ESG, an acronym for environmental, social and governance investing, noting it’s something difficult to do.

“On one end of the spectrum is values-based investing, better known as socially responsible investing,” Caffrey gamely explained. “On the other end is impact, or thematic investing. Somewhere in the middle is ESG, which states, ‘first do no harm’ and screens out harmful companies. It’s also more proactive than SRI in that there is a dual goal of achieving good returns while doing good overall.”

Echoing Gerstein, she added that the industry and investors must be careful about how they use different terms and categories.

“Part of what causes the confusion is how different people view different sectors and investments,” co-panelist Jason Blackwell, principal with Mercer, said. “I’m in California, so I was told it’s okay to mention pot from the stage. When pot is mentioned, some ESG investors say, ‘Absolutely not. It’s the same as alcohol.’ But many millennials say pot is no big deal. So we have to know how they feel about certain items to be able to match the appropriate investment.”

Gerstein then described some of the recent regulatory guidance surrounding ESG, noting that traditionally, the DOL and others took a strict view.

“If you wanted to consider something other than risk and return when considering an investment, you had to compare it with an alternative investment that took risk and return into account. Only when that was satisfied was a so-called tie-breaker allowed and ESG be considered.”

The DOL’s 2015 guidance, however, said numerous studies have provided evidence that incorporating ESG factors do in fact lead to stronger performance, yet Monday’s FAB seemed to clarify that fiduciaries “should be conservative in making the link to better performance or returns,” he said.

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