Ten years after the Department of Labor gave its blessing to socially responsible investments in defined contribution plans, the area finally has come of age.
Some $1.88 trillion in assets were held in socially screened separate accounts managed for institutional clients as of year-end 2006, the most recent data available, up 27% from $1.49 trillion in 2004, according to a survey by the Social Investment Forum, a national organization dedicated to advancing socially and environmentally responsible investing based in Washington. At year-end 1996, the total was $433 billion.
But 10 years ago, SRI investments were not generally accepted by many trustees and consultants, who worried they would run afoul of the Employee Retirement Income Security Acts requirement that plan assets be invested for the exclusive benefit of plan participants.
William M. Tartikoff, chief counsel at Calvert Group Ltd., Bethesda, Md., thought this attitude needed to change and requested an advisory opinion from the Department of Labor.
In a May 28, 1998, response, the DOL advised Calvert that the fiduciary standards of ERISA did not preclude socially screened funds, as long as the investment was expected to provide an investment return commensurate to investments having similar risks.
We were very, very happy to get this letter, Mr. Tartikoff said. Now, 10 years later, we dont have to show it to anyone anymore. The world has opened up to SRI Its becoming more and more mainstream as opposed to being the strange ducks.
While many experts agree the letter has led to a growth in the number of institutions that provide socially screened options to employees, that growth hasnt been stratospheric.
I think (the letter) has made some difference. It certainly is a resource for consultants like ourselves, fund managers, trustees and plan sponsors to look at when theyre looking to adding an SRI fund, said Craig Metrick, U.S. head of Mercer LLCs responsible investment team in New York. But not 100% of plan sponsors are convinced.
Mr. Metrick said many of the plan sponsors and trustees he talks with still harbor performance concerns about SRI strategies performance and dont want to be in the position of having to define what is socially responsible. In addition, some trustees fret that a portfolio companys socially responsible status might go in and out of favor.
What is the risk there? Mr. Metrick said.
However, signs are that SRI is becoming mainstream. Mercer officials recently announced they will start screening all 2,700 active managers in its global database to the extent they integrate environmental, social and governance factors in their investment process.
A June 2007 survey of 129 defined contribution plan sponsors released by the Social Investment Forum and Mercer found that 19% already had an SRI option and an additional 41% planned to add one over the next three years. Mr. Metrick didnt have any more recent data, but from where I sit, were certainly seeing a greater frequency in inquiries, he said.