Department of Labor Field Assistance Bulletin 2018-01
The Department of Labor (DOL) has released three bulletins in the past four years, most recently in April 2018, to provide clarity on ESG (Environmental, Social, Governance) related investments in ERISA governed benefit plans. Though the DOL did not change its view on whether or not ESG funds are appropriate investments within retirement plans, the intent of the FAB was to offer clarity on the evaluation of ESG funds when considering one for inclusion within a retirement plan. A change in this type of investment guidance is not uncommon from administration to administration. The DOL under President Bush issued guidance to make ESG investing more stringent. Then, the DOL under President Obama shifted the guidance to be more lenient on ESG investing. Predictably, the new guidance has a more restrictive tone towards ESG investments and the DOL warns fiduciaries that their focus should be on the economic interests of providing retirement benefits. The FAB advises plan fiduciaries that though ESG factors can be used as “tie-breakers” (previously determined in 2015), they cannot be used to justify underperformance of an ESG fund compared to similar non-ESG funds. Investment performance should be the primary focus of plan fiduciaries.
Utilization Remains Low:
Utilization rates remain low amongst defined contribution plans and participants. According to the statistics published by Vanguard’s “How America Saves 2018,” only 8% of all surveyed defined contribution plans offer a socially responsible investment option while an even smaller 3% of participants actually invest in the given option.
ESG investing has evolved dramatically over the years. What started out as a simple screening process that eliminated certain industries has now expanded into investment managers trying to make an impact at a higher level by either proxy voting or investing in companies and/or projects that target a measurable positive social and environment impact. The focus on ESG has even expanded into multi-asset products as the industry saw the launch of the first ESG focused Target Date Funds in February 2017.
Recent years have brought an expanding array of metrics for evaluating ESG practices and that trend will likely continue. The lack of standardization in the terms and methodologies used to evaluate these strategies has added a level of complexity to the due diligence process though. In addition, ESG is a broad topic covering many areas and factors, from improving human rights practices to reducing a company’s carbon footprint. In 2015, the United Nations created a list of 17 different Sustainable Development Goals in order to help create a practical framework to guide ESG investing, though adoption has been slow. It might be a difficult process for plan sponsors to align the values of the company/participants with the appropriate ESG investment.
- Once again the DOL has released additional guidance in regards to evaluation of ESG funds. Though ESG factors can be used as “tie-breakers” when comparing almost identical funds, Fiduciaries are not allowed to justify underperformance due to ESG factors.
- Less than 10% of plans surveyed by Vanguard offer ESG funds and about 3% of participants that offered ESG funds use them.
- The term ESG covers a wide range of topics causing issues in the evaluation of ESG funds as not all funds manage to the same topics. In addition to issues comparing ESG funds to one another, Plan Sponsors are tasked with making a decision as to what ESG factors they feel best represent what their plan participants are looking for.