US Department of Labor clarifies ERISA fiduciaries’ ability to consider ESG factors

PRI Fiduciary duty in the 21st century

October 23, 2015

The US Department of Labor has released a new Interpretive Bulletin (IB 2015-01) on Economically Targeted Investments (ETIs) and Investment Strategies that Consider Environmental, Social and Governance (ESG) Factors, to:

  • “acknowledge that environmental, social and governance factors may have a direct relationship to the economic and financial value of an investment, and when they do these factors are proper components of the fiduciary’s analysis”;
  • “confirm 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 “tie-breakers” when investments are otherwise equal”.

Crucially, the Interpretive Bulletin says of investments that consider ESG factors: “When a fiduciary prudently concludes that such an investment is justified based solely on the economic merits of the investment, there is no need to evaluate collateral goals as tie-breakers”.

The PRI welcomes the move as a major breakthrough for responsible investment in the US. The announcement sends a clear message that the Department of Labor recognises the materiality of ESG factors.

The PRI and fiduciary duty in the US

On 1 October the PRI held the US launch of its global report Fiduciary duty in the 21st century at the Morgan Stanley Institute for Sustainable Investing in New York.

The report, published by the PRI and UNEP FI, aims to end the debate about whether fiduciary duty is a legitimate barrier to investors integrating ESG issues into their investment processes. The research, based on structured interviews with senior investment professionals, lawyers and policy makers, finds that failing to consider long-term investment value drivers, including ESG issues, is a failure of fiduciary duty.

In addition to global recommendations for institutional investors, intermediaries and policy makers, the report recommended country-specific actions to address specific barriers within each of the eight countries featured in the report. For the US, these recommendations included that the Department of Labour should:

Clarify that:

  • Fiduciary responsibility requires a long-term, risk-adjusted approach to management of pension assets so as to deliver sustainable retirement benefits to participants and beneficiaries in an impartial manner.
  • Asset owners should pay attention to long-term factors (including ESG issues) in their decision-making, and in the decision-making of their agents.
  • Asset owners are expected to proactively engage with the companies and other entities in which they are invested.
  • And clarify that these actions are consistent with asset owners’ fiduciary duties.

Reissue its 2008 bulletins on Economically Targeted Investments and on Shareholder Rights, and:

  • Clarify that asset owners’ duty is to impartially serve the interests of participants and beneficiaries.
  • Clarify that the assessment of the costs and benefits of risk management measures such as active ownership should explicitly consider the long-term benefits of such measures.
  • Clarify that green investments can make important financial and risk mitigation contributions to investment portfolios.

Require asset owners to say how they integrate ESG issues into their investment decisions. As part of these requirements, the Department of Labor should commit to:

  • Review progress annually.
  • Explain how asset owners integrate ESG issues into their investment processes.
  • Analyse how these commitments have affected the actions taken and the outcomes achieved (where the outcomes relate to both investment performance and to the ESG performance of the entities in which they are invested).

History of Labor Department Interpretive Bulletins on ETIs and ESG
The Labor Department previously addressed issues relating to ETIs in IB 94-1 and IB 2008-1.

IB 94-1 corrected a misperception that investments in ETIs are incompatible with ERISA’s fiduciary obligations.
On Oct. 17, 2008, the department replaced IB 94-1 with IB 2008-01. However, the department has now concluded that in the seven years since its publication, IB 2008-01 has unduly discouraged fiduciaries from considering ETIs and environmental, social and governance factors under appropriate circumstances.
In an effort to correct the misperceptions that have followed publication of IB 2008-01, the Department is withdrawing IB 2008-01 and is replacing it with IB 2015-01 which reinstates the language of IB 94-1.