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May 15, 2018

Labor Department Issues New Guidelines: Pension Funds Not Permitted to Sacrifice Investment Returns to Promote Social Policy Goals    

The U.S. Department of Labor and Chief Investment Officers (CIOs) of some of the largest U.S. pensions funds are warning against making divestment decisions based strictly on social issues, emphasizing that it can violate fiduciary responsibility while having little to no corporate impact.

The Labor Department, which oversees retirement plan funds, recently released new guidelines emphasizing that environmental, social and governance (ESG) issues may not always be “prudent” investment choices and therefore must not be “too readily” considered by fiduciaries.

A Field Assistance Bulletin (FAB) released on April 23, 2018 notes:

“…because every investment necessarily causes a plan to forego other investment opportunities, plan fiduciaries are not permitted to sacrifice investment return or take on additional investment risk as a means of using plan investments to promote collateral social policy goals.(emphasis added)

Additionally, the FAB stresses the top priority of fiduciaries must be the long-term value of the fund:

ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits. 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 based on appropriate investment horizons consistent with the plan’s articulated funding and investment objectives.” (emphasis added)

At a recent conference in California, the CIOs of the California State Retirement System (CalSTRS) and the New York State Common Retirement Fund not only reaffirmed this fiduciary duty but also said they opposed divestment efforts because “it doesn’t change cooperate behavior.”

“Divestment hasn’t made the world a better place,” said Christopher Ailman, CIO of CalSTRS, the second-largest pension fund in the United States.

Vicki Fuller, CIO of the New York Fund, agreed noting: “If we divest, we don’t have a place at the table and we don’t change behavior.  We do need our companies to be thinking long term about how they are going to be able to continue to generate their earnings.”

This is why several cities and states across the country, including San Francisco, Seattle and Vermont, have recently rejected full divestment of fossil fuels, recognizing the substantial financial costs it creates while doing nothing to actually help the environment.

New York City Mayor Bill de Blasio should take note, as he continues to recklessly push for divestment of New York City’s public pension funds.  While de Blasio has thus far ignored studies showing New York City would lose up to $120 million per year if it divested and warnings from State Comptroller Tom DiNapoli on the importance of the energy sector to diversification, he should follow the new Labor Department guidelines and put the economic interests of the city’s pension funds and NYC retirees ahead of his politically-motivated agenda.