DOL Cautions Pension Fund, Retirement Plans on Use of ESG Investments, Spending on Related Shareholder Engagement
April 28, 2018
With large investors increasingly engaging on issues beyond financial performance, the Department of Labor has issued a Field Assistance Bulletin that qualifies the agency’s view on how Environmental, Social and Governance (“ESG”) elements can be used in making investment decisions by pension funds and other ERISA fiduciaries, such as retirement plans, adding significant qualifiers to interpretations issued by the Obama Administration. The Bulletin, issued by the Labor Department’s Employee Security Benefits Administration (EBSA) addresses the extent to which ERISA fiduciaries can take economic benefits apart from investment return into account in making investment decisions or putting retirement choices into 401(k) plans.
Two Obama-era interpretations by EBSA reversed previous interpretations and stated that (1) ESG factors can be an integral part of the analysis by a fiduciary when evaluating an investment and fiduciaries can incorporate ESG elements in investment policy statements and evaluations; and (2) proxy voting and shareholder engagement “can be” consistent with a fiduciary’s ERISA duties. The EBSA bulletin notes that “[i]t does not ineluctably follow from the fact that an investment promotes ESG factors… that the investment is a prudent choice for retirement or other investors.” As noted in a Groom Law Group bulletin, “while DOL continues to acknowledge that [such] factors can be a ‘tie-breaker,’” it cautions that “fiduciaries ‘must ‘not too readily treat ESG factors as economically relevant.’” DOL also states that while addition of an ESG investment alternative as part of a 401(k) plan’s investment choices, selection of an ESG fund could violate a duty of loyalty by favoring some participants’ positions over others in choosing the ESG fund. This reduces the likelihood that ESG funds will become default 401(k) plan investment choices.
In addition, with respect to shareholder engagement, the Bulletin states that ERISA fiduciaries should not “routinely incur significant plan expenses to, for example, fund advocacy, press, or mailing campaigns on shareholder resolutions, call special shareholder meetings, or initiate or actively sponsor proxy fights on environmental or social issues relating to such companies.” This could have an impact on the engagement activities of certain ERISA fiduciaries and even those who manage investments on behalf of such fiduciaries, such as larger index funds. In response to the new bulletin, Fiona Reynolds, the Chief Executive of the UN Principles for Responsible Investment, commented in the Wall Street Journal that “no one should doubt the benefits of ESG integration.”