DOL Bulletin Hampers Social Impact Investing

James Lukezic is an ERISA advisor and fiduciary who has held quorums for five of his some thirty clients who requested information about including social impact investing within their 401k plans.

“I illustrated the pros and cons and started a risk-and-reward conversation about the cost of including a water fund in their company 401k plan,” said Lukezic, who works as a retirement plan consultant with Oppenheimer & Co.

But none of his five interested clients opted in.

“Social impact investing is a complicating factor in terms of participating retirement readiness,” Lukezic said.

Although regulatory reforms are expected to incentivize and expand social impact investing to include 401k plans eventually, advocates believe the Department of Labor (DOL) Shareholder Rights Bulletin will hamper that process. The bulletin implies that the act of voting or otherwise addressing long-term environmental, social and governance (ESG) risks are unrelated to the provision of benefits.

“We believe the bulletin is out of date,” said Meg Voorhes, director of research with (US SIF), an organization dedicated to advancing sustainable, responsible and impact investing across all asset classes.

These ESG risks include but are not limited to climate change, human rights abuses and excessive executive compensation

“The bulletin creates a chilling effect on voting proxies and otherwise engaging with companies,” said Joshua Brockwell, investment communications director with Azzad Asset Management.

Some $6.57 trillion in assets are held today by U.S. institutional investors and investment firms that review the ESG practices, risks and opportunities of their investments, according to the US SIF Report on US Sustainable, Responsible and Impact Investing Trends 2014. This is a 76 percent increase from 2012.

“Retirement plan participants en masse make a difference in causes covered by social impact investing by monitoring how fund managers they are invested in vote on proxies, which are their shares in the underlying companies,” Voorhes said.

However, advocates say that unless the DOL rescinds its 2008 Shareholder Rights Bulletin IB 08-02, the fiduciaries’ hands are tied.

“Our view is that if, as the ERISA IB 15-01 states, the consideration of ESG factors in buy/sell/hold decisions and in the portfolio construction process is not inherently suspect, that reasoning necessarily applies to the exercise of shareholder rights,” Voorhes told Advisor News.

The ERISA Interpretive Bulletin (IB) 15-01, which governs the allocation of pension funds, restates the rules that expanded the range of issues which investors, pensions, plan providers and sponsors can consider when making determinations about their investment strategies.

For this reason, US SIF is calling for the DOL to replace the bulletin with the DOL Shareholder Rights Interpretive Bulletin 94-02, which is more accommodative to fiduciaries advising about social impact investing.

“ERISA applies to private sector retirement plans and their fiduciaries while the Department of Labor is responsible for enforcing ERISA and it issues various bulletins and other forms of guidance for this purpose,” said Voorhes.

Juliette Fairley is a business and finance journalist who has written four personal finance books for John Wiley & Sons and has written for major news organizations, such as The New York Times and The Wall Street Journal. She is a member of the American Society of Journalists and the New York Financial Writers Association and a graduate of Columbia University's Graduate School of Journalism. Juliette can be reached at [email protected].

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