In the Department of Labor’s (DOL) Interpretive Bulletin 2015-01, guidance encouraged plan sponsors to incorporate into their plans economically targeted investments (ETIs), investments that are selected, in part, for the social and/or environmental benefits they provide in addition to the investment return. Now, a new Field Assistance Bulletin, No. 2018-01, reminds fiduciaries that economic considerations must take priority over any collateral environmental or social benefits. Fiduciaries may not sacrifice investment return or take on additional investment risk in order to pursue environmental, social, and governance (ESG) factors in an investment.
The guidance of IB 2015-01 restated that only when return expectations and risk profiles are equivalent is a fiduciary permitted to consider ESG factors as a tie-breaker. But it also acknowledged that ESG factors may have a direct relationship to the economic and financial value of an investment. Now, FAB 2018-01 cautions fiduciaries to “not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.” The bulletin states, “A fiduciary’s evaluation of the economics of an investment should be focused on financial factors that have a material effect on the return and risk of an investment based on appropriate investment horizons consistent with the plan’s articulated funding and investment objectives,” demonstrating a somewhat chillier tone from the DOL than in the 2015 bulletin.
Like many investors, plan sponsors are starting to recognize that ESG factors may in fact be indicators of a strong business model and sustainable practices, and serve as a legitimate factor in evaluating investments. The DOL has pulled back slightly on this idea with this new bulletin, and sponsors are cautioned, as fiduciaries, to focus first on financial performance.
We think it’s possible for investors to find impact or ESG-targeted investments that do not sacrifice performance nor add an additional layer of risk. The ESG trend is growing, and as participants demand investments that reflect their social values, plan sponsors will be looking for ways to accommodate that desire and remain in compliance with the DOL’s rules.
Read the full bulletin here: https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2018-01