The PRI is pleased to present two legal perspectives on integrating environmental, social and governance (ESG) issues into investment decision-making under the Employee Retirement Income Security Act (ERISA) guidelines.

Responsible investors have long believed that addressing ESG factors in the investment process is aligned with fiduciary responsibilities, and this perspective was recently confirmed by the U.S. Department of Labor’s (DOL) Interpretive Bulletin 2015-01:

“An important purpose of this Interpretive Bulletin is to clarify that plan fiduciaries should appropriately consider factors that potentially influence risk and return. ESG 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.”

Given the DOL’s acknowledgement of ESG issues as components of fiduciary analysis, it is now clear that investment policies and processes that incorporate ESG factors as economic considerations do not deviate from fiduciary duty, but in in fact sit squarely within the scope of modern interpretations of how fiduciaries make prudent investment decisions.

The following legal perspectives help to clarify, distinguishing between incorporating ESG issues for the purpose of enhancing long-term investment returns and making investments primarily for social purposes. We hope the guidance helps fiduciaries understand why prudence consideration calls for incorporating ESG factors in the investment process and how to do so.

The guidance provided by Morgan, Lewis & Bockius reiterates the conclusions of the Interpretive Bulletin 2015- 01 and clarifies that the duty of loyalty issues raised by earlier DOL guidance on social investing and economically targeted investments (ETIs) do not apply to fiduciaries incorporating ESG factors for the purpose of enhancing long-term investment returns. Groom Law Group highlights the need for a prudent and well-documented process for all investment considerations, including those made using ESG factors, and presents a framework for such a process.

The clarification by the DOL is part of an increasing understanding in the market of the economic consequences of ESG factors in investment performance. For instance, the Sustainability Accounting Standards Board, which includes two former Securities and Exchange Commission (SEC) commissioners on its board of directors,1 is identifying sector-specific reporting standards to improve corporate disclosure of material ESG factors.2 This will aggregate ESG factors with others that are already treated as material considerations by the SEC under U.S. federal securities law.

An increasing number of investors are integrating ESG issues into investment policy statements, portfolio analysis and their investment decision-making process. Many of these organizations have also made a public commitment to incorporating ESG considerations through signing the Principles for Responsible Investment (PRI), a global institutional investor initiative, which has close to 1,500 signatories accounting for $60 trillion.

The PRI’s work, including this publication, is designed to help investors improve their investment processes. In September 2015, in conjunction with peer organizations, the PRI published Fiduciary duty in the 21st century, which recommends to investors, asset consultants, and policy makers the next steps to advance fiduciary duty across eight countries: US, UK, Canada, Germany, South Africa, Brazil, Japan and Australia.

We hope that this report and legal guidance will serve as an action plan for ESG integration across the US financial services sector, and address the remaining misconceptions around ESG and fiduciary duty.

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    Addressing ESG factors under ERISA

    November 2016

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