Many investors have embraced various forms of “impact investing” in which goals other than merely maximizing the rate of return may be employed. Examples include “Environmental, Social and Governance” (ESG) investing, Socially Responsible Investing (SRI) and Economically Targeted Investing (ETI). In each case, the investor has broader goals than pure profit.
While an individual investor may choose “impact investing” as part of an overall strategy, the issues are different when one is acting in a “fiduciary capacity” on behalf of others.
Employers who sponsor employee benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA) must be aware that they have a duty to plan participants to protect the assets that are held within such plans.
Thus, the question arises: Can a plan sponsor embrace socially conscious investing while maintaining its fiduciary duty to plan participants?
The Department of Labor (DOL), which is charged with enforcement of ERISA, has provided guidance over the years to address this particular question. In 2015, the DOL provided new guidance following concerns that its prior guidance was unnecessarily restrictive of such investment.
ERISA imposes a fiduciary duty on the sponsors of employee benefit plans. Such a duty imposes a high standard pursuant to which the best interests of plan participants is paramount. Accordingly, those charged with investment strategy are generally expected to judge possible investments on the basis of the relative economic merits, with the goal of maximizing returns for the benefit of the plan.
Nevertheless, the DOL guidance provides two different scenarios in which “impact investing” concepts may be employed, and further emphasizes that the use of such concepts does not impose any special burden of proof.
First, the DOL acknowledges that environmental, social and governance issues may not be merely “collateral” but may, in fact, be relevant factors in assessing the economic value of an investment. In such cases, a plan fiduciary is not prevented using those factors to evaluate the economic merits.
In addition, there is no additional burden or special documentation necessary when ESG factors are used to assess economic value. The DOL admitted that prior guidance may have implied as much, and it declared such language inoperable.
Second, the DOL allows non-economic factors to be embraced fully as “tie-breakers” among competing investments that are economically equivalent.
In other words, once two or more possible investments are determined to be of equal value on economic terms, then the fiduciary may choose to adopt “impact investing” principles to make the final choice. Again, there is no special burden or higher threshold that applies to such choices.
Accordingly, “impact investing” principles can be employed by those acting in a fiduciary capacity on behalf of an employee benefit plan, but such cannot be the sole, driving principle. They can be used as a factor in determining economic merit, or as a “tie-breaker” when choosing among investments of equal value.