The U.S. Department of Labor (DoL)’s rules for economically-targeted investments (ETIs) made by retirement plans covered by the Employee Retirement Income Security Act (ERISA), allows investment strategies that consider environmental, social and governance (ESG) factors.
The move aims to clarify a misperception of a 2008 bulletin that discouraged fiduciaries from considering ETIs and ESG and a 1994 bulletin that prohibited ERISA trustees from promoting ESG or public policy causes at the expense of lower expected returns or taking on greater risks.
ETIs are investments selected for the benefits they create in addition to the investment return to the employee benefit plan investor.
“Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand,” Labor Secretary Thomas Perez said. “We have heard from stakeholders that a 2008 department interpretation has unduly discouraged plan fiduciaries from considering economically targeted investments. Changes in the financial markets since that time, particularly improved metrics and tools allowing for better analysis of investments, make this the right time to clarify our position,” he said in a press release announcing the change.
The new guidance, Interpretative Bulletin 2015-01 (IB 15-1), is the third time that the Labor Department has addressed issues relating to ETIs, dating back to 1994 (IB-94-1) and 2008 (IB 2008-01).
The new bulletin “confirms the department’s longstanding view from IB 94-1 that fiduciaries may not accept lower expected returns or take on greater risks in order to secure collateral benefits, but may take such benefits into account as ‘tiebreakers’ when investments are otherwise equal with respect to their economic and financial characteristics.”
Guidance also acknowledges that ESG factors “may have a direct relationship to the economic and financial value of an investment,” according to the Labor Department. “When they do, these factors are more than just tiebreakers but rather are proper components of the fiduciary’s analysis of the economic and financial merits of competing investment choices.”
The financial health of retirement plans and participants “remains paramount under federal law,” the DoL said.
Ford Foundation President Darren Walker called it a welcome step that will benefit both fund beneficiaries and society at large. “A growing body of evidence shows that these factors directly and significantly impact financial returns on investments. They are part and parcel of prudent investment decisions, and should be taken into account,” said Walker, who chairs the National Advisory Board on Impact Investing (NAB), a leading national group pushing for the change.
“As a society, we’ve only begun to see the potential of impact investing to unleash economic, social and environmental benefits. Today is an important step toward realizing this promise and using the power of markets to help solve some of our most urgent social problems,” Walker said.