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  • Nicholas Zaiko, CIMA

DOL Guidance on ESG Investments

Updated: Mar 15, 2019

Millennial Interest in ESG Investments

A recent survey by Natixis found that 82% of plan participants want their investments to reflect their personal values. Millennials account for 77% of plan participants surveyed that want more socially responsible investments in their retirement plans. In fact, 71% stated that they would contribute or increase their retirement plan contributions if their investments were socially responsible. Amid this growing demand from plan participants, the DOL has provided guidance on ESG (environmental, social and governance) investments for retirement plans.


DOL Guidance on ESG Investments

In response to this increased demand for ESG investments, especially, for retirement plans, the Department of Labor (DOL) issued some guidance on April 23, 2018. The Field Assistance Bulletin No. 2018-01 (FAB) updates previous DOL Interpretive Bulletins (IBs) IB 2015-01 and IB 2016-01 regarding ESG investments.


This FAB is of interest to plan sponsors as they respond to participant requests that their retirement plans include ESG investments. Essentially, the DOL guidance reinforces that plan sponsors should apply the same due diligence process in selecting ESG-type investments for retirement plans.


IB 2015-01, highlighted that in the process of investment selection when competing investments are economically equivalent, then plan fiduciaries can use ESG-related considerations as tie-breakers for an investment choice.


IB 2016-01, plan fiduciaries may engage in shareholder proposal activities if it may improve the corporation’s investment value, after considering the associated costs. It also indicates that Investment Policy Statements can include criteria for ESG factors, screening tools, metrics, or analyses to evaluate an investment.


The DOL’s FAB emphasizes that fiduciaries should prioritize the economic interests of the plan in providing retirement benefits. It should not dramatically forego investment returns or assume greater investment risks to meet ESG criteria. It is not mandatory that investment policy statements contain guidelines on ESG investments or integrate ESG-related tools to comply with ERISA. However, it may still be best practice to document acceptable criteria for ESG investments so that fiduciaries understand the criteria for quality ESG investments. The DOL cautions fiduciaries against routinely incurring substantial plan costs to actively sponsor proxy fights on environmental or social issues.


Types of ESG Funds

The DOL identified different types of ESG funds such as Socially Responsible Index Fund, Religious Belief Investment Fund, or Environmental and Sustainable Index Fund. There ae also conventional funds not explicitly identified as ESG funds that consider ESG factors in their selection criteria and portfolio management.


ESG Investments in 401(k) and 403(b) Plans

The DOL confirmed that including ESG funds in retirement plan investment fund menus that reflect the participants’ social value is permissible. Like any other fund selected for a retirement plan, it should be prudently evaluated, professionally managed, and well diversified. The inclusion of ESG funds should not exclude other non-ESG funds that provide additional diversification.


ESG Investments in QDIA

The FAB addresses the selection of a qualified default investment alternative (QDIA) to which participants may be automatically defaulted. The selection of a QDIA is not the same as simply adding an ESG fund to the investment line-up where participants can make choices.


The selection of an ESG-themed target-date fund as a QDIA would not be prudent if the fund provided a lower risk/return profile than non-ESG target-date funds.


DOL discourages the use of ESG-only investment options as QDIAs. However, this does not preclude the selection of a QDIA that has an ESG-fund in the mix of other non-ESG funds as part of the underlying funds.


Investment Policy Statements

The FAB indicates that when the retirement plan’s Investment Policy Statement (IPS) includes guidelines for ESG investments, an investment manager is still responsible to determine if the ESG factors in the IPS are consistent with ERISA. At times, investment managers may not be able to comply with the IPS if it is not consistent with ERISA. Best practices, however, would be for the investment manager to point out these inconsistencies to the plan fiduciaries rather than blatantly violate the IPS.


Proxy Voting and Shareholder Engagement

The FAB emphasizes that the costs of shareholder engagement and proxy voting is important and it would be inappropriate for ERISA fiduciaries to routinely incur significant plan expenses. This is consistent with IB 2016-01 that indicates that ERISA plans involved in proxy voting and shareholder engagement may comply with a fiduciary’s obligation under ERISA. It also cautioned that fiduciaries should not engage in costly fund advocacy or actively sponsor expensive proxy battles on environmental or social issues concerning their specific corporate stock holdings.


GAO Report in 2018

The Government Accountability Office (GAO) is expected to issue a report in 2018 on how US retirement plans should handle ESG investments and how other countries handle these investments.


Considerations for Plan Sponsors

Like any other investment decision, plan fiduciaries should maintain well-documented records regarding their evaluation, selection and decision to invest in an ESG fund. They should consider the ESG investment based on its performance, reasonable fees, diversification, quality of the underlying investments, and sound investment principles. Investments should not be solely focuses on the potential social benefit and impact. Interestingly, as more investors embrace ESG factors in their investment selection, demand will typically rise for quality ESG companies which in turn may raise the performance of those investments.




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