DOL Refines Views on Pension Fund Use of ESG Investments, Spending on Shareholder Engagement

May 04, 2018

With large investors increasingly engaging on issues beyond financial performance, the Department of Labor issued a Field Assistance Bulletin qualifying 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. 

The Labor Department’s Employee Benefits Security Administration (EBSA) added significant qualifiers to prior interpretations by the Obama administration on the extent ERISA fiduciaries (i.e., pension funds) can consider economic and social benefits apart from investment return in making investment decisions or putting retirement choices into 401(k) plans. 

The two Obama-era EBSA interpretations addressed by the new Bulletin provided:
  • 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 

  • Proxy voting and shareholder engagement “can be” consistent with a fiduciary’s ERISA duties. 
The new bulletin qualifies these, saying, “[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." 

Guidance for fiduciaries:  “While DOL continues to acknowledge that [ESG] factors can be a ‘tie-breaker,’” notes a Groom Law Group update, “fiduciaries must not too readily treat ESG factors as economically relevant.”

Shareholder engagement was also addressed by the bulletin, stating 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. 
Response from ESG advocate:  "No one should doubt the benefits of ESG integration," said Fiona Reynolds, Chief Executive of the UN Principles for Responsible Investment.