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Pension Funds Must Now Consider Environmental Factors

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By 2.8 min readPublished On: Tuesday, November 10th, 2015Categories: Environmental Law

You may not have noticed, but with over $9 Trillion invested in U.S. pensions you should care that the U.S. Labor Department released Interpretive Bulletin 2015-01 providing guidance on the investment duties of pension plans when considering investments, now requiring that they take into account environmental, social and governance factors.

It is significant that the Federal government is telling pensions plans what criteria to use when selecting investments, including taking into account climate change and other environmental factors.

It is also significant that this is a change when the Labor Department over the last 30 years has consistently stated, including in IB 94-1, that investing fiduciaries may not use plan assets to promote social, environmental, or other public policy causes at the expense of the financial interests of the plan’s participants and beneficiaries in receiving their promised benefits. It has long been the rule that a fiduciary may not accept lower expected returns or take on greater risks in order to secure collateral environmental or other benefits.

In 2008, the Department replaced IB 94-1 with IB 2008-01, purporting not to alter the legal principles set forth in IB 94-1 and stating its purpose was to clarify that fiduciary consideration of collateral, non-economic factors in selecting plan investments should be rare and, when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.

The Department now apparently believes that in the 7 years since its publication, IB 2008-01 “has unduly discouraged fiduciaries” from considering environmental and other collateral factors. In an effort “to correct the misperceptions that have followed publication of IB 2008-01,” the Department is withdrawing IB 2008-01 and is replacing it with IB 2015-01 which reinstates the language of IB 94-1.

IB 2015-01 “confirms the Department’s longstanding view that plan fiduciaries may” engage in environmentally targeted investing based, in part, on the collateral benefits so long as the investment is appropriate for the plan and economically and financially equivalent with respect to the plan’s investment objectives, return, risk, and other financial attributes as competing investment choices. The word “may” likely will be read very broadly in the context of this guidance and plan fiduciaries seeking to mitigate risks of litigation will now make investments decisions taking into account environmental, social and governance factors.

Given the huge impact that investments from U.S. pension plans have, that ERISA fiduciaries are being directed to take into account environmental, social and governance factors when investing, may have a dramatic impact on a variety of sectors in the economy (not only energy and utilities, but also real estate and other sectors with large environmental footprints). It is likely an overstatement to say as some have that this is “forcing green politics on pension funds,” but make no mistake there will be winners and losers.

My recent blog post, Harvard Business Review Adds Environmental Performance to Ranking CEOs, buttresses the belief that the business world has changed dramatically in recent years, now taking into account environmental, social and governance factors in a broad breadth of business decisions.

The new guidance is no doubt positive. It makes clear that pension plans should fully take into account the risks and rewards of climate change and the like. This law firm works with businesses in matters of sustainability in a wide variety of business sectors that will be winners under this new Interpretive Bulletin.

 

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About the Author: Stuart Kaplow

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Stuart Kaplow is an attorney and the principal at the real estate boutique, Stuart D. Kaplow, P.A. He represents a broad breadth of business interests in a varied law practice, concentrating in real estate and environmental law with focused experience in green building and sustainability. Kaplow is a frequent speaker and lecturer on innovative solutions to the environmental issues of the day, including speaking to a wide variety of audiences on green building and sustainability. He has authored more than 700 articles centered on his philosophy of creating value for land owners, operators and developers by taking a sustainable approach to real estate, including recently LEED is the Tool to Restrict Water Use in This Town and All Solar Panels are Pervious in Maryland. Learn more about Stuart Kaplow here >