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ESG Investing Enters 'New' Paradigm.

Byline: John Manganaro

Summary paragraph: Environmental, social and governance investing expands under ERISA

The Department of Labor (DOL)'s Interpretive Bulletin 2015-01 will significantly expand the use of environmental, social and governance (ESG) investing principles under the Employee Retirement Income Security Act (ERISA).

Labor Secretary Thomas Perez, speaking at a press conference, said the new guidance is meant "to return us to a common sense approach" by re-establishing principles first introduced under Interpretive Bulletin 1994-1 (IB 94-1). He explained the need to repeal the controversial Interpretive Bulletin 2008-1, which until now provided the most direct guidance about ESG issues for retirement plan fiduciaries.

According to Perez, in 2008, the DOL unnecessarily put the brakes on ESG investing for no good reason and has left the qualified retirement planning space "a decade or more behind other segments of the investing markets when it comes to economically targeted investments (ETI)," his preferred name for this type of investing.

As Perez explained it, the Labor Department previously had addressed issues relating to ETIs in Interpretative Bulletin 94-1. "[The publication] corrected a misperception that investments in ETIs are incompatible with ERISA's fiduciary obligations," which existed beforehand, Perez said. "[The guidance also] contains much clearer discussion and explanation of how responsible fiduciaries should and should not use ESG/ETI factors while creating and managing portfolios under ERISA," he said.

"The new interpretative bulletin does not in any way supersede the 'investment duties' regulatory standard at 29 CFR Section 2550.404a-1, nor does it address any issues that may arise in connection with the prohibited transaction provisions of ERISA," Perez observed.

"Rather, IB 2015-01 confirms the department's longstanding view that plan fiduciaries may invest in ETIs based, in part, on their collateral benefits so long as the investment is as appropriate for the plan and economically and financially equivalent with respect to its investment objectives, return, risk and other financial attributes compared with competing investment choices."

"What makes this an even more appropriate decision is that the quality of analysis and real-time analytics around ESG factors has just improved so dramatically since 2008," said Matthew Patsky, CEO of Trillium Asset Management, who attended the event. "It's an entirely different world, from that perspective."

Perez hinted at the potential for more upcoming guidance in this area. In 2008, there was a sister bulletin issued alongside 2008-1-Interpretative Bulletin 2008-2-which deals with related questions concerning when it is appropriate for retirement plan participants and sponsors to operate as "shareholder activists"-using plan assets to influence the way companies or industries are managed. These questions call for an analysis similar to that in the ETI reform, Perez said, and so the DOL is actively looking into revising 2008-2.

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Date:Dec 1, 2015
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