The Second Shoe Falls: The Tougher DOL Fiduciary Rule on Responsible Investment
What’s NEW in USDOL Interpretive Bulletin 2015-1?
This new Interpretive Bulletin is focused on how the fiduciary standard articulated in ERISA should be interpreted and applied when economically targeted investments (ETI’s) are considered. While many investment managers pay lip service to the fact that this new Bulletin says environmental, social, and governance factors may be considered when considering investment vehicles, most have been quick to say that this is nothing new, it’s simply a restatement of Bulletin 94-1, adopted during the Clinton Administration.
Nothing could be less accurate.
Bulletin 94-1 for the first time said that when various investment opportunities are being considered, Trustees may consider something besides simply maximizing returns - that is, just getting as much money back on their investments as possible. The 94-1 said that Trustees could also consider so-called “collateral benefits” of an investment, like whether the investment was environmentally sound, or whether, as with construction projects, it might lead to more hours worked and thus more returns on the investment. The Bulletin said that if all other things are equal, then the extra collateral benefits could be used as a “tie breaker”. This has often been abbreviated the “all things being equal/ tie breaker” rule.
Then in the last days of the GW Bush administration, Bulletin 2008-1 suddenly appeared — it was a confused and confusing re-statement of Bulletin 94-1 which was so garbled, no one was sure what it meant, but it did put a “freeze” on some consideration of “collateral benefits” since Trustees could not tell exactly what standard of fiduciary behavior they were being measured against in this new Bulletin.
Now, Bulletin 2015-1 has come along after years of debate about it within the Obama Department of Labor, and now that it is out, much of Wall Street is saying that it’s just a return to the Clinton rule - that collateral benefits can be considered but only as tie-breakers. They often also concede that this allows them to consider ESG factors as tie breakers.
This is just not correct - it ignores the clear language in the Federal Register’s Supplementary Information, filed by the USDOL to help clarify and make explicit the mandates of this new Bulletin. The simplest way to see how different this new Bulletin is meant to be is to simply quote directly from the Federal Register (see Federal Register, Vol. 80, No. 206, Pg.65135 et seq, October 26, 2015)
First, it starts out with what plan fiduciaries “should” do --
"An important purpose of this Interpretive Bulletin is to clarify that plan fiduciaries should appropriately consider factors that potentially influence risk and return. Environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment. In these instances, such issues are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices. Similarly, 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."
This opening salvo in the Federal Register deserves the closest reading - the DOL is clearly alerting fiduciaries that the issue is no longer just “tie breakers” — instead it is clearly indicating that the “economics” of an investment include ESG factors - they are NOT just collateral tie breakers any more —
ESG factors are to be at the heart of any investment “economic considerations”. That’s strong language insofar as it leaves no question about where ESG factors fit into investment decision making processes - they are right at the heart of the process since the USDOL is now saying that “economics”, the question of how risky an investment is and how much it may therefore return, always includes consideration of ESG factors.
Second, it gets even more explict and states an absolute mandate:
"As in selecting investments, in selecting investment managers, the plan fiduciaries must reasonably conclude that the investment manager’s practices in selecting investments are consistent with the principles articulated in this guidance.” (Emphasis added)
This mandate is not about what “should” be done - it is about what “MUST” be done - plan fiduciaries MUST select investment managers who incorporate ESG factors into the “economic” analysis of any investment opportunity.
So what does this mean a plan fiduciary should and must do? At one level, it’s easy to say but it may be difficult in practice — a plan fiduciary should make written inquiry of each investment manager, current or potential, and ask for a written response, as to how they consider ESG factors when evaluating the economics of any investment. And in addition, the plan fiduciaries should insist that investment managers regularly report on how each investment vehicle used or proposed has been considered in terms of ESG factors.
This can be difficult because at some point plan fiduciaries have to study and learn exactly what the term ESG means. A good place to begin is at the PRI website - the website developed as the result of a UNEP Project in 2006, which created Principles of Responsible Investing (PRI) and lists in considerable detail what E and S and G factors might be considered when evaluating any investment….but that’s different topic for a different day.
The important topic here and now is that Bulletin 2015-1 is not just “more of the same” or a simple “restatement” of Bulletin 94-1 — it is instead an attempt by the USDOL to make sure that the ever evolving standard of fiduciary duties under ERISa takes into consideration newer thinking on sound investment - thinking which realizes that economic returns cannot be maximized in our ever more interdependent complex investment world without considering environmental, social and governance factors inherent in each and every investment decision to be made.
Bill Sokol has been an attorney with Weinberg, Roger & Rosenfeld since 1976. Practicing primarily in the ERISA and Benefits area, Bill represents Pension Funds, Health and Welfare Funds, and Apprenticeship and Training Funds as both sole and co-counsel. He also dedicates considerable time in negotiating Project Labor Agreements for the construction industry while continuing to represent Unions in labor relations.