U.S. DOL Guidance on ESG Investing - Restatement or Retreat?

The United States Department of Labor created a ripple in the shared value waters by issuing a Field Assistance Bulletin (FAB) in late April designed to “clarify” earlier interpretations of federal laws governing regulated pension fund investments. In a press release accompanying the new bulletin, the Department stressed that its new guidance makes clear that “ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits. The FAB announced that fiduciaries of ERISA-covered plans must avoid too readily treating ESG (Environmental, Social, Governance) issues as being economically relevant to any particular investment choice. It further advises that ERISA does not necessarily require plans to adopt investment policy statements with express guidelines on ESG factors.”

Analysis of this DOL announcement has highlighted the ways in which it is both nothing new – under Obama administration guidance investors had, and continue to have, a clear fiduciary obligation to put economic returns ahead of other investment considerations – and out of step with growing trends in valuing corporate commitment to so-called ESG factors as part of a full evaluation of current and future financial performance.

What’s all the fuss about?

According to the Forum for Sustainable and Responsible Investment (US SIF), whose members include the very funds covered by the recent US DOL guidance, financial assets being invested under some sort of targeted socially responsible strategy have climbed 33 percent since 2014 to nearly $9 trillion in U.S.-domiciled assets. In addition, US SIF reports that more than investors and money managers filed shareholder resolutions on ESG issues between 2014 and 2016 covering $2.56 trillion.

There is no sign of investor retreat from this growth – in fact, quite the opposite. My colleague Nathan Houdek noted the recent letter from Blackrock CEO Larry Fink, cautioning corporate executives to consider not just short-term profits but longer-term societal impact from their business activities in order to remain in Blackrock’s good graces.

In a similar vein, Vanguard’s chairman Bill McNabb and nine other investors, together representing more than $15 trillion in assets under management, recently wrote to corporate CEOs attending The CEO Force for Good’s Investor Forum earlier this year. In that letter, McNabb advised CEOs to discuss the following factors with investors as a way to blend the twin goals of shareholder returns and sustainable (environmental, social, human capital) business practices:

  1. “What are the key risk factors and megatrends (such as climate change) your business faces over the next three to seven years and how have they influenced corporate strategy?”
  2. “How do you identify your financially material business issues and which frameworks do you use for reporting on these issues? How do these figure into your future strategy and capital allocation plans?”
  3. “How do you describe your corporate purpose and how do you help your employees share your vision for the company’s role in society? How does this shape your long-term strategy? How does your future strategy act upon this purpose?”
  4. “How do you manage your future human capital requirements over the long-term and how do you communicate your future human capital management to your investors?”
  5. “What is the corporation’s framework/strategies for interacting with its shareholders and key stakeholders?”
  6. “How will the composition of your board (today and in the future) help guide the company to its long-term strategic goals?”
  7. “What is the role of the board in setting corporate strategy, setting incentives for and overseeing management? How does the corporation ensure a well-functioning and diverse board accountable to its key stakeholders?”

Notably, the investors framed this guidance to the CEOs in part by challenging them to focus on their long-term strategy to manage risk over three to seven years, defining their vision for a robust strategy as follows:

A long-term plan provides a corporation with an opportunity to communicate its view of key financially material risks, including long-range mega-trends (such as climate-related risks) and the relevant frameworks used to identify environmental, social and governance (ESG) factors.

The bottom line? Commitment to shared value strategies that generate positive financial returns for business in ways that contribute to positive societal impact should be a major focus on the strategy of every publicly traded company – and the closely held companies that compete with them! We can officially add mounting investor pressure for a more holistic assessment of corporate purpose and impact to the growing chorus from employees and customers who have for some time been voting with their feet and with their wallets in favor of more environmentally and socially conscious business strategies.