A recent U.S. Department of Labor (DoL) bulletin has prompted some investors to question the DoL’s stance on environmental, social and governance (ESG) criteria in investing. The April bulletin is the latest in a series of publications from the DoL that discuss the use of ESG factors by ERISA1 plan fiduciaries making investment decisions.
The recent bulletin, known as Field Assistance Bulletin 2018-01 (FAB 2018), was produced to clarify the earlier publications, and it was not put in place to discount the importance of ESG criteria in investment analysis. The latest bulletin is meant to supplement, rather than replace, the previous publications from the DoL. We believe the overarching theme of the DoL guidance is unchanged: material ESG issues are a prudent consideration in investment decisions. In our view, ESG integration helps investors uncover extra-financial risks that may not be evident in traditional financial statements (see ESG Integration and Investment Excellence).
In this article, we provide background on FAB 2018, and discuss certain nuances in FAB 2018 that should be considered.
Background on the DoL Publications
The Employee Benefits Security Administration (EBSA),2 an agency within the DoL, released FAB 2018 as well as its predecessor publications, Interpretive Bulletins 2015-01 and 2016-01 (Figure 1).
The first bulletin, IB 2015-01, marked a watershed moment for large institutional investors, as it validated their efforts to expand their commitments to allocate funds into ESG-focused investment strategies. We commented on that guidance in a 2015 podcast.
IB 2016-01 explained that fiduciary responsibilities include proxy voting and engagement. The bulletin noted the “existence of financial benefits associated with shareholder engagement,” and mentioned that more institutional investors are engaging with companies on ESG issues. The bulletin also offered guidance to plans on their statements of financial policy used to govern investment management decisions. It stated that maintaining such policies aligns with ERISA guidelines and that the policies can incorporate ESG considerations.
The purpose of FAB 2018 is to guide DoL staff on how to comply with ERISA. Importantly, it is considered supplemental and less important than the previous interpretive bulletins.
A Closer Look at FAB 2018
In this latest bulletin, the DoL slightly reframed how fiduciaries should consider the use of ESG factors in investment decision making and plan design. It kept in place the core principles of the previous bulletins and the relevance of ESG, noting that “there could be instances when otherwise collateral ESG issues present material business risk or opportunities…that qualified investment professionals would treat as economic considerations under generally accepted investment theories.”
However, the new language cautioned that fiduciaries should not “too readily” treat ESG issues as important from an investment perspective. It stated that a fund marketed as ESG is not by default an appropriate investment option. We agree with the DoL’s notion that broad ESG integration must be grounded in investment merit, and should be approached with materiality in mind; that is, some ESG factors matter more than others for maximizing long-term risk-adjusted returns (see Materiality Imperative in ESG Integration). We also concur with this key theme of the DoL bulletin: the evaluation of ESG factors and other relevant economic factors that materially impact returns is part of an appropriate investment approach for a fiduciary.
We were encouraged by the 2015 and 2016 bulletins and are pleased to see the DoL release this 2018 update to help further clarify their previous guidance.
We remain committed to our long-standing belief that investors can benefit from fully integrating material ESG research into fixed income investment decisions, as ESG research looks beyond financial statements into additional factors that could be highly relevant to long-term performance.
 ERISA plans are those under the Employee Retirement Income Security Act of 1974, or ERISA.
 EBSA is responsible for administering, regulating and enforcing the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). This federal law governs the administration of pension plans and 401(k) plans offered to their employees by private employers in the United States.
 US SIF Comments on DOL Field Bulletin on The Fiduciary Standards Under ERISA, 4/26/18. Available here: https://www.ussif.org/blog_home.asp?Display=103
 The bulletin also discussed how proxy voting and shareholder engagement are not by nature expensive activities.
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