New Department of Labor Guidance a Positive Development for Responsible Investing
Washington — On April 23, the Department of Labor (DoL) issued Field Assistance Bulletin No. 2018-01 (FAB 2018-01) to provide guidance to its staff receiving questions from plan fiduciaries and other interested stakeholders about integration of environmental, social and governance (ESG) factors in evaluating investments for ERISA plans.
From Calvert’s perspective, FAB 2018-01 is a positive development. It seeks to clarify rather than change the Obama-era guidance provided in Interpretive Bulletin 2015-01 (IB2015-01) and provide further direction on the appropriate way to implement ESG investing in ERISA plans.
ESG and materiality
The FAB states that fiduciaries must always put first the economic interests of the ERISA plan in providing retirement benefits and be focused on financial factors that have a material effect on the return and risk of an investment. To quote from FAB 2018-01, “To the extent ESG factors, in fact, involve business risks or opportunities that are properly treated as economic considerations themselves in evaluating alternative investments, the weight given to those factors should also be appropriate to the relative level of risk and return involved compared to other relevant economic factors.”
A key component of Calvert’s research is focused on materiality, which identifies the ESG factors that we believe are likely to influence company or industry financial performance. Our research system identifies and weighs ESG factors based on their financial and social impact using 200 industry peer group models. The most relevant key performance indicators are selected and weighted for each ESG issue, to maintain focus on areas we believe are most material to each company’s operations.
Advancing the conversation
This bulletin was a topic of conversation when I served on an Impact Investing panel at the Milken Global Conference in California. Our panel spoke about the continued need for the regulatory framework to evolve to support the growth of ESG and Impact Investing globally. Guidance like this bulletin is a key part of this framework.
Since the mid-1990s, the DoL has issued three Interpretive Bulletins on a fiduciary’s ability to consider ESG factors under ERISA, in 1994, 2008 and 2015. Through this guidance, it has been DoL’s consistent view that so long as an investment option is selected solely on the basis of its economic value to the plan, it is permissible for that investment option to also consider ESG factors. In this regard, last week’s FAB guidance that ESG factors that present material business risks or opportunities are themselves appropriate economic considerations takes a step towards recognizing all of the work that has been done to demonstrate that ESG data can give investors better insight about a company’s risks and returns.
Another part of the evolution of the framework is the development of reporting standards, such as those from the Sustainability Accounting Standards Board, and the availability of data to create reliable metrics for investors to use to evaluate ESG risks and opportunities. Transparency and disclosure from corporations and issuers of debt are critical to the development of a robust ESG investment market.
Bottom line: FFAB 2018-01 seeks to clarify rather than change the existing DoL guidance on the appropriate way to integrate ESG factors in evaluating investments for in ERISA plans. Its focus on financial factors that have a material effect on the return and risk of an investment reflects Calvert’s research-driven approach to Responsible Investing.