In a move bolstering increased investment in environmental, social, and governance (ESG) funds, the Department of Labor reinstated interpretive guidance this week stating that retirement funds are permitted to consider both economically targeted investing (ETI) and ESG factors in making investment decisions without running afoul of ERISA's fiduciary provisions. The guidance addresses a longstanding debate over the level of analysis ERISA retirement plan fiduciaries, including defined contribution plan sponsors, must engage in before investing in funds that have objectives beyond financial returns and risk assessment. It overturns 2008 guidance stating that such factors should be considered only "in very limited circumstances" which DOL said had the effect of "unduly discourag[ing] [funds] from considering ...ESG factors" through "higher but unclear standards of compliance." The change reinstates the text of a 1994 interpretation that gives an official green light to investment in ESG and economically targeted investments, but goes a step further in the preamble to say that such factors are not merely collateral considerations, but in certain circumstances may be "proper components of the fiduciary's primary analysis of the economic merits of competing investment choices."
The interpretation is likely to encourage social investors and large state pension funds to incorporate ESG and ETI factors in making and promoting investments to a greater extent, and will likely trigger an increase in ESG activism. However, while that activism, led by state pension funds and other social investors, has made numerous headlines, whether or not ESG investing ultimately yields any benefits to firm value is still very much in question. In fact, according to a recently released report by the Manhattan Institute, social activism from public pension funds is associated with negative subsequent firm value. The rise of ETI investments—investments with a collateral socioeconomic goal—as well as the use of ESG factors in making investment decisions has been notable since the 2008 financial crisis and is part and parcel of the larger debate as to whether corporations serve shareholders or a larger group of stakeholders which includes their employees and the community. The guidance was met with immediate praise by social investors, such as Calvert funds and the National Advisory Board on Impact Investing, which called the guidance "a welcome step that will benefit both fund beneficiaries and society at large."