The Department of Labor's recent field bulletin reiterating its policy on environmental, social and governance factors is a timely reminder that fiduciaries must do their homework as carefully before selecting an ESG-related investment as they would for any other investment.
The DOL appears to have been concerned that ESG-related investments have become so accepted as mainstream that fiduciaries might be tempted to relax when deciding to pursue such investments and in selecting the particular investment strategies.
This is revealed by the warning in the bulletin that: "Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision." The bulletin added that it does not automatically follow from the fact that an investment that promotes ESG factors, or promotes positive general market trends or industry growth, makes it a prudent choice for retirement investors.
"Rather, ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits," it said. "A fiduciary's evaluation of the economics of an investment should be focused on financial factors that have a material effect on the return and risk of an investment."
That is, fiduciaries may consider ESG criteria in their plans' investments, but they must not let their desire to do good blind them to possible lower returns or greater risks.
Pension fund investments already do much good by securing the retirement incomes of millions of workers.