DoL confusing ERISA plan fiduciaries on ESG

Recent US Field Assistance Bulletin muddies the water on ESG, argues Paul Hodgson

Don’t invest in ESG funds if they present a lower level of return and/or a higher rate of risk than a non-ESG fund. Don’t spend too much money engaging with corporations on ESG issues.

There, I said it in two sentences.

I’m sure they were trying to be helpful, but the latest Field Assistance Bulletin (FAB) from the US Department of Labor (DoL) is not very much assistance. It is supposed to ‘interpret’ the Interpretive Bulletins (IBs) 2016-01 and 2015-01 for the Employee Benefits Security Administration’s offices so they can answer questions they might receive from plan fiduciaries, but it is so full of the most blindingly obvious interpretation that it seems like a bit of a waste of time.
When you consider that almost a third of official posts among the senior leadership team at the DoL are still vacant because the Trump administration either can’t or can’t be bothered to fill them, it would seem to me that there are more important things for them to do.
The PRI, which has put out a large amount of research on ESG materiality, as well as some specific guidance on the IBs, agrees that the FAB is unhelpful: “While the DOL’s decision to release the FAB could generate unnecessary confusion for plan fiduciaries, no one should doubt the benefits of ESG integration.”The assistance is dressed up in nice language: “Investment decisions cannot promote collateral social policy goals…” unless plan fiduciaries can make more money by doing so. Decisions should be “focused on financial factors that have a material effect on the return and risk of an investment based on appropriate investment horizons”, but if these are ESG-based then so be it. “IB 2016-01 does not imply that [investment] policy statements must include ESG factors”, but they can. “ESG-themed investment alternatives” can be added to 401(k) pension platforms as long as “non-ESG-themed investment options” are not removed to make room for them. In choosing a qualified default investment alternative (QDIA), an ESG fund that presents a lower rate of return and/or a higher risk should not be chosen. See what I mean?
Lastly, the FAB says it’s fine to engage on all the issues that activist investors typically engage on, because ERISA allows investment managers to be appointed, and it is they who generally vote shares. But, it adds, IB 2016-01 was not meant to say that either investment managers or individual plan investors should “routinely incur significant expenses” in the exercise of these shareholder rights. So, no proxy solicitation or proxy contests, but I don’t see that submitting a shareholder resolution, running a press campaign should incur significant expenses.