The language may seem mild, but the implications are immense. A U.S. Department of Labor (DOL) statement holds a key breakthrough for the future of responsible investment and sustainable markets.
In rescinding its 2008 bulletin on Economically Targeted Investments (ETIs) the DOL has just published an interpretive bulletin stating its intention is to clarify “that fiduciaries should appropriately consider factors that potentially influence risk and return.”
“Fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social, or other such factors. When a fiduciary prudently concludes that such an investment is justified based solely on the economic merits of the investment, there is no need to evaluate collateral goals as tie-breakers” says a revised preamble to its 1994 guidance.
U.S. guidance is key for many global markets – like Japan, for example. In Europe, institutional investors have been leading in demanding non-financial information, which includes ESG material – from business. It has also become clear how important these issues are to the millenials – the future investors.
“This is a huge game changer for responsible investment in the United States, an exciting and welcome development ” says Fiona Reynolds, Managing Director of the Principles for Responsible Investment (PRI).
When the PRI developed its U.S. strategy two years ago, it cited that “the narrow interpretation of Fiduciary Duty in the U.S., given the ERISA guidelines, was the biggest obstacle to responsible investment” she adds.
Morgan Stanley MS +0.83% was quick to welcome the DOL decision. “Prudent investors want to make investment decisions using as much materially relevant information available to them as possible,” said Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing.
“Our work at Morgan Stanley has found that a large number of investors want to invest for both social impact and financial return, and today’s announcement will enable Americans saving for retirement to more easily do exactly that” she added.
The impact of the DOL decision on Europe will be interesting to watch. European pension funds have led the world globally in the integration of responsible investment, and have played a key role in promoting such investment in the U.S., mainly through the fund managers they have mandates with in the American market.
“If it weren’t for these large mandates, we would not have seen the movement we have to date in the mainstream investment community in the U.S.” says Ms Reynolds. “We may see that some European funds are more willing to invest with more U.S. managers, if the integration of ESG factors in the investment process matures, given the DOL announcement” she adds.
More importantly, she says: “We hope to see the domestic pension fund market in the U.S., that has really lagged behind, begin to catch up.”