Saturday, December 5, 2015

Dan Kolber's Article on New ERISA Law -

New ERISA law interpretation encourages impact investing

In October, the U.S. Department of Labor issued an interpretation that will accelerate the mainstreaming of Impact Investing, which are investment strategies that consider environmental, social and governance (“ESG”) factors. This trend is driven by millennials who invest based on the impact their investment has on society and not just on economic yields. According to The Forum for Sustainable and Responsible Investment, U.S. domiciled assets under management using ESG principles rose 76 percent to $6.57 trillion at the start of 2014 from $3.74 trillion at the start of 2012.
Sections 403 and 404 of the Employee Retirement Income Security Act (“ERISA”) require a fiduciary of retirement assets to act prudently, which, up to now, the DOL interpreted to mean that fiduciaries could never subordinate the economic interests of their investment choices to unrelated objectives, such as ESG factors. Now, according to the new Interpretive Bulletin 2015-01 “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.”
A DOL Fact Sheet and the Interpretative Bulletin can be found at the Department of Labor’s website at

Previously, the DOL had said that fiduciaries who were willing to accept reduced returns or greater risk to secure collateral benefits such as impact on society were in violation of ERISA. Such ESG factors could only be considered by fiduciaries as “tie-breakers” when choosing between investment alternatives that were otherwise equal with respect to return and risk over the appropriate time horizon. This standard was referred to as the “all things being equal test” test. In 2008, the DOL softened their position by saying that the fiduciary’s consideration of ESG, non-economic factors in selecting investments should be “rare” and should be documented in a manner that demonstrated compliance with ERISA’s “rigorous fiduciary standards.”
Now the DOL is whistling a different tune. The new DOL Interpretative Bulletin states that:
1. Environmental, social, and governance issues may have a direct relationship to the economic value of an investment, not as tie-breakers, but as components of the fiduciary’s primary analysis of the economic merits of competing investment choices.
2. ERISA does not prohibit a fiduciary from incorporating ESG factors in investment policy statements or integrating ESG-related tools, metrics and analyses to evaluate an investment’s risk or return or choose among otherwise equivalent investments.

3. Fiduciaries who consider ESG criteria in making investment decisions are not required to maintain additional documentation to demonstrate compliance with ERISA’s fiduciary provisions.
Even Goldman Sachs is getting on the impact investing bandwagon through two recent experiments in issuing “social impact bonds”. The first issuance failed followed by a successful issuance last month. Here’s how Social Impact Bonds work: Goldman Sachs raises money and then lends the money to a government via a bond to meet certain social goals. If the goals are met, the government agency that received the bond proceeds, pays back the full amount of the amount borrowed plus an above-market return. If the goals are not met, the government pays nothing.
The failure involved Goldman Sachs issuing a bond this summer that funded a program to reduce recidivism at Rikers Island Prison in New York. Since recidivism was not reduced, Goldman Sachs lost the full amount of the bond. But last month, there was a different, better result. In Utah, Goldman Sachs issued a $4.6 million bond to fund programs in Utah to help students with special education needs. If the kids were mainstreamed, the government would pay back to Goldman $2,500 for each student. Result: Enough students were mainstreamed to repay Goldman back the full amount plus more than 5 percent.
1. This is not the final word by DOL because in the DOL Fact Sheet the DOL makes the statement that ERISA fiduciaries are still required to “choose economically and financially superior investments.” If you are an ERISA fiduciary getting into impact investing, consult your lawyer.
2. Before engaging in impact investing, do your due diligence. For example, just because someone says his products are “organic” doesn’t mean that they are.
3. If you are raising capital abroad for impact investing, Europeans are more advanced than the U.S. in this area but the European Union recently adopted a law called the AIFMD Directive that restricts marketing of funds there.
4. Traditionally, most impact investments have been issued as exempt, unregistered securities via Regulation D. Increasing, there are socially responsible publicy-traded mutual funds. Morningstar said it will attach impact scores to these funds.
Dan Kolber is an Atlanta attorney and owner of Intellivest Securities Research Inc.