Last month I wrote a blog about new guidance the Department of Labor (DOL) issued regarding economically targeted investments (ETIs), otherwise known as environmental, social, and governance (ESG) investments or socially responsible investments (SRI). Field Assistance Bulletin No. 2018-01 was perceived by many, including myself, to be more skeptical of the role of ETI investments in ERISA plans. This seems to run counter to prior guidance from the DOL under the Obama Administration in 2015 and 2016 that seemed to encourage the use of ETIs by plan sponsors.
For example, FAB 2018-01 states:
“Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.”
As I discuss the new guidance with clients, it has created confusion for plan sponsors about the use of these investments within their investment menu. Should we consider these options for our plan if we don’t have them already? If we already include these types of products, do we need to re-think their inclusion in the menu?
While not exactly helpful, it is comforting to know we aren’t alone in our confusion. About a month after the DOL issued their guidance, the U.S. Government Accountability Office (GAO) issued a report (GAO-18-398) titled “Retirement Plan Investing: Clear Information on Consideration of Environmental, Social, and Governance Factors Would Be Helpful.” In their report, the GAO interviewed asset managers and reviewed retirement plans from other countries to evaluate the status of ESG factors in retirement plans. Based on their research, the GAO issued two recommendations:
- The Assistant Secretary of Labor for the Employee Benefits Security Administration (EBSA) should clarify whether an Employee Retirement Income Security Act of 1974 plan may incorporate material ESG factors into the investment management for a qualified default investment alternative (QDIA).
- The Assistant Secretary of Labor for EBSA should provide further information to assist fiduciaries in investment management involving ESG factors, including how to evaluate available options, such as questions to ask or items to consider.
So far, the DOL has not responded to either recommendation. Without further guidance from the DOL, we continue to believe:
- It is appropriate to use prudently-managed, well-run ESG/SRI investment options within your plan’s menu
- Do not use ESG/SRI criteria in selecting your plan’s QDIA
- Document the inclusion of ESG/SRI criteria within your plan’s Investment Policy Statement
- ESG/SRI options should be included because you reasonably believe that they have a positive economic impact on the expected return and/or expected risk of an investment. (For example, a belief that companies following certain best practices from a governance perspective are going to have better returns or greater future growth.)
- ESG/SRI options should not be included just to appease participants or make a subset of your plan population feel good
If you would like more information on the topic of socially responsible investments, feel free to contact a Multnomah Group consultant.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.
Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.