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Is DOL Making an ESG ‘Investment’?

Regulatory Agencies

While you were firing up the barbeque last Friday, the Labor Department dropped off a proposed rule titled “Financial Factors in Selecting Plan Investments.”

It’s not immediately clear what the focus of the rule is (other than the obvious), though it is flagged as not “economically significant.” There’s a suspicion that it might have something to do with ESG (environmental, social and governance) investing—a topic on which the Labor Department has previously provided some perspective, albeit in the form of Field Assistance Bulletins.

The most recent was published almost exactly two years ago—FAB 2018-01. These are documents designed to provide guidance to the Employee Benefits Security Administration’s national and regional offices “to assist in addressing questions they may receive from plan fiduciaries and other interested stakeholders”—and in this specific case, about Interpretive Bulletin 2016-01 (relating to the exercise of shareholder rights and written statements of investment policy) and Interpretive Bulletin 2015-01 (relating to “economically targeted investments” (ETIs)).

Previous Guidance

That guidance was widely viewed as “walking back” the tone of the 2016 Interpretative Bulletin, which had expressed concern that fiduciaries had been reluctant to incorporate ESG considerations in proxy voting “or undertaking other shareholder engagement activities.” The 2018 FAB (issued after a change in administrations) acknowledged that in IB 2016-01, the DOL had noted that investment policy statements are permitted to include policies concerning the use of ESG factors to evaluate investments, or on integrating ESG-related tools, metrics, or analyses to evaluate an investment’s risk or return. It then went on to clarify, however, that that former discussion “…does not reflect a view that investment policy statements must contain guidelines on ESG investments or integrating ESG-related tools to comply with ERISA,” nor does that IB “imply that if an investment policy statement contains such guidelines then fiduciaries managing plan assets, including appointed ERISA section 3(38) investment managers, must always adhere to them.” 

In other words, “if it is imprudent to comply with the investment policy statement in a particular instance, the manager must disregard it.”

ESG Interest(s)

Interest in ESG remains high among institutional money managers, many advisors and—if surveys are to be believed—the investing public, including retirement plan participants, and particularly younger participants. 

Nonetheless, workable, consistent definitions of ESG remain fluid, and perhaps as a result, the adoption rate among defined contribution plans has been tepid—and the take-up rate among participants even lower. Fewer than 3% of plans offer an ESG option, according to the 62nd annual Plan Sponsor Council of America survey, and less than 0.2% of plan assets have been invested in those options. 

Will this rule seek to move, or secure that status? Time will tell—the Office of Management and Budget generally has up to 90 days to vet the request and either approve it for release or send it back for modifications—but often takes less than 30 days to do so.

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