Field Assistance Bulletin 2018-01

Field Assistance Bulletin 2018-01: New Tone, Same ESG Analysis

Field Assistance Bulletin 2018-01

Field Assistance Bulletin 2018-01 issued by Trump administration. Recently, the Employee Benefits Security Administration (EBSA) within the Department of Labor (DoL) released Field Assistance Bulletin 2018-01 (link) relating to ESG (environment, social and governance) and shareholder rights for ERISA governed benefit plans. I set out some brief high-level analysis on the guidance below.

Big picture: Field Assistance Bulletin 2018-01

DoL administers, regulates and enforces the administrative provisions of the Employee Retirement Income Security Act of 1974 (ERISA). ERISA governs the operation of retirement benefit plans offered by most private sector employers in the US. State and local public employers are exempt from the provisions under ERISA being largely governed by state and securities laws. However, such non-ERISA plans tend to have fiduciary duties (FD) similarly drafted to ERISA’s meaning that the agency interpretation of the standard of investor fiduciary duty in ERISA is regarded as having some inferential weight for non-ERISA governed plans. As such, DoL guidance re investor fiduciary duty is often regarded as having broad significance in the way capital markets think about FD / ESG.

DoL guidance, in the form of agency issued Interpretive Bulletins (IB’s) on investor fiduciary duty and ESG, has changed according to the political complexion of the administration; more permissive or encouraging of ESG/shareholder engagement in 1994, 2015/16 (under Democrats), less permissive in 2008 (under Republicans).

IB’s were issued in 2015 and 2016, which were regarded as positively clarifying the scope for ERISA fiduciaries to consider ESG factors in their investment decisions and engagement with corporations on those themes – in a manner consistent with ERISA’s fiduciary standards of prudence and loyalty.

An expectation I heard repeated many times was that, given the disposition of the current administration, the IB’s issued in 2015 and 2016 would be subject to withdrawal and replacement – to remove any perceived encouragement of ESG / shareholder engagement practice. An IB is agency issued guidance and is not subject to review and comment procedures for the issuing agency. As such, DoL can withdraw and replace IB’s in short order. The ESG guidance issued recently by the DoL was issued in the form of a Field Assistance Bulletin (FAB). The FAB is official guidance issued by agency leadership to its enforcement staff in the field which details how they should interpret various rules and regulations for enforcement purposes. As is the case with an IB, it is not subject to notice and comment.

Key Takeaways from Field Assistance Bulletin 2018-01

  • The analytical architecture of IB-2015 and 2016 remains unchanged. ESG factors are an appropriate component of a prudent investment decision provided they are financially material and that shareholder engagement in connection with economically relevant issues is consistent with fiduciary practice.
  • The FAB seeks to identify high-level guardrails on the intent and costs involved in ESG factors and shareholder engagement.
  • The FAB does raise questions about the appropriateness of the use of ESG in 401k default funds, and dedicates significant text to this purpose.

In summary, a change of tone from the DoL FAB on ESG, but much better than might have been expected from the current administration.

Field Assistance Bulletin 2018-01: Interpretation of the Guidance

The analytical architecture is unchanged by the FAB: Fiduciaries are not permitted to sacrifice financial returns to pursue “collateral” non-financial benefits. Fiduciaries should focus on financial materiality of factors in the investment decision. Field Assistance Bulletin 2018-01 confirms, using different language, the conclusion of IB-2015 that ESG factors are an appropriate component of a prudent investment decision provided they are financially material. So called collateral “social objectives” can continue to be considered as tie-breakers in an investment decision when considering economically equivalent investments.

IB-2015 was understood to be an attempt by DoL to remove a barrier to US investors considering ESG factors in their investment decisions; the previous 2008 guidance was widely understood to have had a chilling effect on ESG practice particularly by ERISA fiduciaries. The most recent Field Assistance Bulletin 2018-01 seems to be a moderately drafted attempt to put guardrails on the width of interpretation of the language in IB 2015 regarding ESG factors – to ensure that the focus remains on financial materiality.

The new cautionary language in the DoL FAB on ESG is tonally different from the prior IB on ESG. The consideration of “general market trends” and may cause fiduciaries poorly versed in ESG investing trends to seek additional guidance from their plan advisors.

The recent Field Assistance Bulletin 2018-01 confirms that ERISA plans can maintain Investment Policy Statements with ESG requirements consistent with IB-2016. It also confirms that such language in an IPS must be implemented in a manner consistent with ERISA.

The recent Field Assistance Bulletin 2018-01 confirms that plan fiduciaries can conduct shareholder engagement where they reasonably consider it to be in the best economic interests of the plan. The FAB adds explicit guardrails around not incurring significant costs, whether directly or through investment managers, for pursuing such engagement – and requiring cost-benefit analysis for such elevated expenditures. That approach merely replicates language from prior guidance.

About This Post

Brian TomlinsonThis post was first published as “DoL/ESG: New tone, same analysis” on LinkedIn on May 3, 2018. This version includes minor revisions, mostly to improve search ability. Guest author, Brian Tomlinson is Research Director, Strategic Investor Initiative at CECP. The Strategic Investor Initiative convenes CEO-Investor Forums to provide a venue in which CEOs can share their long-term plans with audiences of long-term investors and contribute to reorienting our capital markets toward the long-term. Read the Strategic Investor Initiative’s Investor Letter to CEOs, signed by Bill McNabb and nine other institutional investors, and Six Reasons why companies should share their long-term thinking.

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