DOL Reversal on ESG Investing Catches Up to the Markets

Previous DOL rules placed improper obstacles between fiduciaries and their legal obligation to serve the best interests of their participants and beneficiaries.

Climate change, human rights controversies and public health concerns are driving significant changes at corporations around the world.    

The social, environmental and governance (ESG) performance of companies matters to the public and it increasingly matters to investors. Over the last several decades, it has become clear that incorporating ESG factors into the investment process has helped to reduce long-term risks and improve corporate behavior. This realization has led to a global explosion of investors—asset managers and asset owners—who are engaged in sustainable, responsible and impact investing.      

Research by US SIF documented that investment approaches that incorporate social and environmental factors has grown steadily in the last decade, with the largest growth ever recorded between 2011 and 2013. At the start of 2014, $6.57 trillion in assets were held by U.S. institutional investors and investment firms that assess social or environmental factors in their portfolio companies and funds. This $6.57 trillion represents one in six dollars under professional management in the United States today, up from one in nine dollars in 2012. Similar growth has occurred in other regions of the world. Thoughtful consideration of ESG risks and opportunities is found across all asset classes, including listed equities, fixed income, private equity and real estate.   

While this explosive growth has occurred, some fiduciaries looked askance at incorporating ESG factors.  Some of this resistance was based on 2008 Department of Labor (DOL) guidance. Fiduciaries of private sector retirement plans subject to the Employee Retirement Income Security Act (ERISA) were concerned they would expose themselves to additional legal and regulatory scrutiny if they either took into account environmental, social and governance factors in assessing investment risks and opportunities, or considered the collateral environmental or social benefit an investment option might offer beyond its financial returns to the plan. The 2008 bulletins were out of step with investment practices in the U.S. and globally from the moment they were issued.

US SIF and its members and colleagues consistently communicated to the DOL that these bulletins placed improper obstacles between fiduciaries and their legal obligation to serve the best interests of their participants and beneficiaries.

NEXT: DOL catches up with market

Several weeks ago, at a press conference in New York, Secretary of Labor Thomas Perez announced that the DOL had rescinded one of the 2008 bulletins, which focused on “economically targeted investments.”

The Department wisely returned to its 1994 guidance which made it clear that fiduciaries may consider the so-called “collateral impacts” of their investments, so long as they were not knowingly reducing risk adjusted returns in doing so. The preamble to the Department’s new guidance states that fiduciaries of private sector retirement plans “need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors.” 

Secretary Perez noted when announcing this change:

"Today, we finally catch up to the breathtaking change we've seen in this space over the last few decades. By restoring the 1994 guidance, we bring ERISA investors together with economically targeted investment opportunities— allowing the capital to meet the opportunity, allowing the money to meet the marketplace."

The DOL action removes the chilling effect of the 2008 guidance.  A 2011 survey by US SIF and Mercer of hundreds of public, corporate, faith-based, health care and other defined contribution retirement plans—most of which were subject to ERISA—found that a majority of the plans said that “clearer legal or regulatory support for fiduciaries (in order for them) to engage in SRI sustainable investing” was either “very important” or “important.” The DOL makes it abundantly clear that ERISA is not a legal barrier to integrating ESG factors into the investment process. 

The new Bulletin is also consistent with the growing consensus view internationally that fiduciary duty may compel consideration of ESG factors in investment analysis and ownership practices.   A recent report by the United Nations Environmental Program Finance Initiative (UNEP-FI) found that “…there are positive duties on investors to integrate ESG issues. Failing to consider long-term investment value drivers, which include environmental, social and governance issues, in investment practice is a failure of fiduciary duty.”  The DOL guidance is clear that fiduciaries may utilize social and environmental factors in making investment decisions.

We anticipate that investment managers with ERISA clients and those who manage money for a broader set of clients will more fully consider environmental, social and governance issues going forward. We know that some may not. What is clear, however, is that ERISA guidance no longer stands in the way.

Lisa Woll is CEO of US SIF:The Forum for Sustainable and Responsible Investment, a professional association that advances sustainable, responsible and impact investing.   


This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Asset International or its affiliates.