US pension plans allowed to consider ESG in GP selection

The US government will no longer discourage private industry retirement plans from investing in ESG-focused funds.

The US Department of Labor issued new guidance giving private industry pension funds the green light to consider environmental, social and governance (ESG) factors when deciding where to invest their capital. The guidance rescinds a 2008 bulletin that discouraged retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) from considering ESG when investing.

The 2008 guidance interpreted sections 403 and 404 of Part 4 of Title I of ERISA to mean that fiduciaries should never subordinate the economic interests of the plan to unrelated objectives like ESG, implying that impact investing was only acceptable under very rare circumstances.

Those 2008 guidelines prevented approximately $8.4 trillion in defined benefit and defined contribution plans from opting to invest in funds that consider ESG factors when making investments.

The Department of Labor withdrew the 2008 guidance and replaced it with Interpretive Bulletin 2015-01, which states that ERISA in fact 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 when choosing among otherwise equivalent investments.

“Complying with one's fiduciary obligation is essential and necessary, but it doesn't automatically exclude taking into consideration or making progress on other important, socially-responsible goals. These goals include, but are not limited to, infrastructure development and green energy, among others,” said US Secretary of Labor Tom Perez in a press conference.

Private equity managers, especially those accepting capital from European investors, have been under increasing pressure to incorporate ESG considerations into their investment strategies in recent years. About 56 percent of North American GPs and 69 percent of European GPs have established ESG programs, according to a survey from Pitchbook published earlier this year.

ESG is also becoming a make or break factor for private equity investors, 76 percent of whom have ESG on their list of criteria when choosing a fund manager and 71 percent of whom have said they would reject a fund on ESG grounds, according to a research from London Business/Adveq and PwC.