Art by Jun KimOver the decades, Republican and Democrat administrations have engaged in
periodic tightening and loosening of the rules governing the extent to which
fiduciaries may take environmental, social and governance (ESG) factors into
account in making investment decisions. This puts fiduciaries in a difficult
position whenever the rules change, as they recently have in the Department of
Labor (DOL)’s publication of Interpretive Bulletin 2015-01, in October.
The classic example of ESG investing is a collectively bargained
pension plan’s financing or acquisition of an interest in a real estate project
constructed with union labor to create more jobs for union membership. An
alternative version of this use of plan assets is an investment in affordable
housing that is located in the same area as the union. However, consideration
of ESG factors is by no means restricted to plans of unionized workers and
could come into play if a plan sponsor adopts an investment policy favoring
investment in companies meeting certain “green” criteria. A sponsor might like
to invest plan assets in companies it sees as socially beneficial, such as
those managed with the participation of their employees or companies perceived
to negotiate fairly with their workers.
Through the early 1990s, the DOL issued a number of advisory
opinions and information letters holding that economically targeted investments
(ETIs) would not be prudent if they provided a plan with less return than
comparable investments available to it with a commensurate level of risk.
Conversely, ETI investments would be imprudent if they involved a greater risk
to the security of plan assets than other investments offering a return similar
to the ETI investments. Thus, a decision to make an ETI investment could not be
influenced by non-economic ESG factors unless the investment, when judged
solely on its economic value to the plan, would be equal or superior to
available non-ETI investments. This is sometimes referred to as the
“all-things-being-equal” test, because it permits ESG factors to be considered
by a fiduciary as a tiebreaker once it has been determined that the economic
factors are equivalent.
The Clinton administration strongly favored ETIs and issued
Interpretive Bulletin 94-1 to promote them. While careful to preserve the
all-things-being-equal test, this guidance concluded that if this requirement
were met, “the selection of an ETI, or the engaging in an investment course of
action intended to result in the selection of ETIs will not violate” the
Employee Retirement Income Security Act (ERISA)’s prudence or exclusive benefit
rules. Congressional testimony was given looking forward to the day when ETI
investing would be an “unremarkable, ordinary investment practice.”
In the waning days of George W. Bush’s presidency, the DOL,
acting on the Bush administration’s belief that the 1994 interpretive bulletin
had gone too far, issued Interpretive Bulletin 2008-1. This emphasized that
“fiduciaries who rely on factors outside the economic interest of the plan in
making investment choices and subsequently find their decision challenged will
rarely be able to demonstrate compliance with ERISA absent a written record
demonstrating that a contemporaneous economic analysis showed that the
investment alternatives were of equal value.” The 2008 bulletin also included
five examples showing how various ETIs failed the all-things-being-equal test.
The political winds having again shifted, the Obama
administration believes that the need for a written economic analysis “unduly
discouraged fiduciaries from considering ETIs and ESG factors.” This has led to
the replacement of the 2008 bulletin, as previously noted, with Interpretive
Bulletin 2015-01. This latest guidance reinstates its 1994 predecessor more or
less word for word.
The preamble to Interpretive Bulletin 2015-01, however, adds
a new element to the ongoing policy debate by stating the DOL’s belief that
ESG-related tools, metrics and analyses may be used to evaluate an investment’s
risk or return or to choose among otherwise equivalent investments. Up to now,
ESG factors have been treated as separate from the economic analysis of an
investment. Taken to its logical conclusion, the thought expressed in the
preamble could mean that a fiduciary may consider ESG factors.
Marcia S. Wagner is
an expert in a variety of employee benefits and executive compensation issues,
including qualified and non-qualified retirement plans, and welfare benefit
arrangements. She is a summa cum laude graduate of Cornell University and
Harvard Law School and has practiced law for 28 years. Wagner is a frequent
lecturer and has authored numerous books and articles.