In recent years, there has been an increase in considering environmental, social, and governance (ESG) criteria when it comes to investing. However, not all investors agree that ESG factors should be considered when identifying prudent investments. The Department of Labor (DOL) recently put out a bulletin that clarified how ESG criteria can be used by plan fiduciaries in making investments.
ESG criteria, also called socially responsible investing, may include looking at pollution, sustainability practices, community relationship, employee benefits, shareholder rights, and transparency in governance. These factors are not traditionally part of investment analysis but may impact economic considerations.
2015 EBSA Bulletin
The Department of Labor issued a bulletin in 2015 which stated, “if a fiduciary prudently determines that an investment is appropriate based solely on economic considerations, including those that may derive from environmental, social and governance factors, the fiduciary may make the investment without regard to any collateral benefits the investment may also promote.”
2018 EBSA Bulletin
More recently, the DOL issued an updated bulletin to clarify how ESG considerations can be made under ERISA. Field Assistance Bulletin No. 2018-01 is intended to provide guidance to assist the EBSA in answering questions from plan fiduciaries and other stakeholders regarding the prior ESG bulletins.
ESG Investments and Fiduciary Duties
The bulletin states that ESG issues are appropriate economic considerations and should be considered by a prudent fiduciary along with other relevant risk and return factors. However, the bulletin also appears to limit the weight ESG factors should be considered, as “appropriate to the relative level of risk and return involved compared to other relevant economic factors.”
A fiduciary cannot rely solely on an investment that promotes ESG interests as being a prudent choice for plan participants and beneficiaries. Additionally, investment policy statements are not required to include ESG investment guidelines.
Even if investment policy statements include ESG policy factors, the fiduciaries managing plan assets only have to follow the policies if they are consistent with ERISA fiduciary obligations of prudence and loyalty. Or, as is described in the bulletin, “if it is imprudent to comply with the investment policy statement in a particular instance, the manager must disregard it.”
QDIA and Investment Alternatives
When plan participants request investment alternatives that involve ESG interests, adding an ESG alternative does not mean the fiduciary has to forego adding one or more other non-ESG investment alternatives. However, a fiduciary should not offer an ESG investment option based on collateral public policy goals. Any ESG funds must still meet the ERISA fiduciary requirements (such as if an ESG fund offered a lower rate of return or a greater degree of risk than a non-ESG alternative).
San Diego Employment Benefit Lawyers
If you have any questions about fiduciary duties in considering ESG investments or have any other questions about ERISA fiduciary investment considerations or prudent processes concerning investment selections, the law firm of Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help you and your company succeed.
