How Investors Will React to the DoL’s New ESG Guidelines

Will the U.S. Department of Labor’s new ESG guidance prompt more pension funds to embrace sustainable investing?



For Amy O’Brien, head of responsible investment at $639 billion TIAA-CREF Asset Management, 2016 could be a very busy year. She predicts a rise in environmental and social investing options for retirement plan clients to meet pent-up demand, with new guidance from the U.S. Department of Labor playing a big role in the shift.

The guidance “has increased the comfort factor for plan fiduciaries to engage further on this topic and explore possible strategies” in sustainable investing, says O’Brien, whose New York–based firm manages assets for more than 16,000 institutional investors, including many U.S. universities and colleges.

Rather than conveying a rule change, an interpretive bulletin issued by the DoL in October reframes the agency’s stance on how pension funds governed by the Employee Retirement Income Security Act (ERISA) can legally consider environmental, social and governance (ESG) factors when investing. Whether this guidance will encourage new players to integrate ESG — or simply validate those investors that already do — remains to be seen.

The DoL bulletin stresses that “fiduciaries need not treat commercially reasonable investments as inherently suspect . . . merely because they take into consideration environmental, social, or other such factors” that “may have a direct relationship to the economic value of the plan’s investment.” By contrast, the 2008 guidance it replaces warned that considering nonfinancial factors should be “rare.”

Timothy Hauser, a deputy assistant secretary at the DoL and an author of the recent bulletin, says he hopes it will reverse a “chilling effect” on sustainable-investment strategies. In 2008 “there was some concern that some fiduciaries were subordinating the plan’s interest to social goals that ran counter to participants’ financial interest,” Hauser explains. The U.S. Chamber of Commerce and other business groups were among those that lobbied for the 2008 language, he adds: “This is one of those instances where I think the medicine was worse than the problem.”

U.S.-managed assets with some form of ESG filter totaled $4.86 trillion in 2014, a threefold increase from $1.59 trillion in 2005, according to the Washington-based U.S. SIF: The Forum for Sustainable and Responsible Investment. The growth is formidable, but one of Hauser’s co-authors wonders if the 2008 directive might have dampened it. “Just as the market was escalating, we put out guidance that seemed to send the message that, as [Secretary of Labor Thomas Perez] has said, ‘These products have cooties,’” says Judy Mares, another DoL deputy assistant secretary.


The terms “ESG” and “sustainable investing” may be new, but this year’s bulletin covers old ground for the DoL. What is now a discussion of the role of ESG has its origin in debates about whether ERISA union pension funds could legally invest in union construction projects. In the late 1970s, DoL officials drew from trust law to establish the everything-being-equal test, which holds that if two investments have comparable risk-return profiles, fiduciaries may consider the social benefits of one to be a tiebreaker. In 1994 this stance was made official in the first interpretive bulletin on the subject. After a rise in sustainable investment prompted words of caution in 2008, the latest guidance reinstates the 1994 position.

Technically, ERISA and all DoL bulletins that derive from it apply only to private pension funds, including multiemployer, or Taft-Hartley, plans. But state plans and others look to the federal law for best practices — especially in California and other states that craft their pension legislation from ERISA’s language.

Ian Lanoff, a principal at Washington-based Groom Law Group who has served as outside fiduciary counsel for the Florida State Board of Administration, the New Mexico Educational Retirement Board, the New York State Common Fund, the Ohio Public Employees Retirement System and others, says several of his clients have called to ask him about the implications of the DoL’s new notice, but he’s yet to hear from plans long resistant to ESG that are now ready to dive in.

Still, Lanoff has witnessed other effects. The guidance makes state funds he works with that already run ESG strategies more comfortable with their approach, he says. “They’ve been criticized for doing it, and now they can point to the Labor Department ruling,” Lanoff notes. “Whether Taft-Hartleys or even corporate funds are going to be more inclined to use ESG now, we won’t know for a year or two, I don’t think.”

The $188 billion California State Teachers’ Retirement System welcomes the change. “As CalSTRS has long believed that environmental, social and governance issues present risk to our portfolio, we support the DoL’s language,” says CIO Christopher Ailman.

Jamie Henn, a co-founder of fossil fuel divestment campaign, sees an opportunity to influence retirement plans’ thinking. “This could be a game changer for divestment campaigns that are targeting large pension funds,” New York–based Henn tells Institutional Investor. “These new guidelines clearly state that ethical considerations are completely compatible with fiduciary duty.”

Rather than speculate on whether the new guidance will drive wider ESG uptake, Hugh Lawson, New York–based head of ESG and impact investing at Goldman Sachs Asset Management, contends that the more interesting development is the fact that his corner of the industry has pushed the DoL to respond.

“I think the question ‘How do my investments line up with my broader sense of values?’ is a question that’s here to stay,” Lawson says: “I don’t think this is just a passing fad or the province of some narrow portion of the market. I think the DoL’s change in tone is just a sign of the times.”