Jennifer Mink Principal National Labor & Management Conference February 15, 2016 Economically Targeted Investments Recent DOL Guidance for ERISA Fiduciaries

22 New DOL Interpretive Bulletin On October 22, 2015, The U. S. Department of Labor Employee Benefits Security Administration released Interpretive Bulletin (IB 2015) ….to provide guidance on the investment duties of plan fiduciaries under ERISA when considering economically targeted investments (ETIs) and investment strategies that take into account environmental, social and governance (ESG) factors.

Background The “socially conscience” community has seen three waves of evolution in issues … Each of these waves has used slightly different terminology (and acronyms) to signal the shift in focus… Socially Responsible Investing (SRI) Environmental, Social, and Governance (ESG) Economically Targeted Investments (ETI) 3

Socially Responsible Investing (SRI) Focused initially on human rights issues such as child labor laws, reasonable wages, workers’ health, safety and working conditions. As progress on these issues were made and best practices were established, their focus expanded to include corporate impact on the environment (toxic waste disposal, waste water, air pollution, etc.) and corporate governance issues (anti-takeover provisions, compensation, board independence and diversity, etc.). So the terminology evolved….. 4

Environmental, Social and Governance (ESG) The order of words and inclusion of the terms “environmental” and “governance” were more reflective of the expanded scope of focus. The approach to issues used by investors can be roughly divided into three groups… 5

SRI/ESG not considered – Some investors may have included some considerations in proxy voting policies, but not in investment decision making. Passive SRI/ESG – Investors use investment screens to eliminate specific companies engaged in activities that are not in keeping with SRI/EGS tenants. Active SRI/ESG – Investors initiated and participated in collective corporate actions to change corporate behavior as opposed to passive divestiture. 6 Environmental, Social and Governance (ESG)

Economically Targeted Investments (ETI) Encompasses a wide range of activity, most of which have local economic development and job creation overtones, as well as the ESG agenda. Energy and Environment Focused – Funding start-up, or providing growth equity for companies involved in alternative energy (solar, wind, geothermal) or providing environment friendly services and products (contamination mitigation, recycling, toxic waste processing, etc.). Real Estate Focused – Union-friendly local development, low income housing, local infrastructure investment, timberland, farmland. 7

ETIs and ERISA Funds ETI movement has been led predominantly by large public plans, religious orders, and university endowments….all of which are NOT covered by ERISA. Sections 403 and 404 under ERISA require all decisions to be made for the “sole and exclusive benefit” of plan participants. 8

ETIs and ERISA Funds Interpretive bulletins in 1994 and again in 2008, expressed the view that ERISA… …does not permit fiduciaries to sacrifice the economic interests of plan participants in receiving their promised benefits in order to promote collateral goals …consideration by plan fiduciaries of an investment’s non-economic factors should be “rare”. 9

ETIs and ERISA Funds The Department consistently stated that under ERISA, a plan trustee or other investing fiduciary… 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. May not accept lower expected returns or take on greater risks in order to secure collateral benefits. 10

The Department has recognized that fiduciaries may consider such collateral goals as tie-breakers when choosing between investment alternatives that are otherwise equal with respect to return and risk over the appropriate time horizon. ERISA does not direct an investment choice in circumstances where investment alternatives are equivalent… But the burden of proof was on the plan trustees to document the economic equivalency of decisions. 11 ETIs and ERISA Funds

The Department recently expressed concern that the 2008 guidance may have dissuaded fiduciaries from … …pursuing investment strategies that consider environmental, social, and governance factors, even where they are used solely to evaluate the economic benefits of investments and identify economically superior investments, and …investing in ETIs even where economically equivalent. 12 ETIs and ERISA Funds

New Interpretive Bulletin (IB 2015) Environmental, social, and governance issues may have a direct relationship to the economic value of the plan's investment. Such issues are not merely collateral considerations or tie- breakers. 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. 13

Trustees may utilize “socially responsible funds” as investments for defined benefit, defined contribution, and H&W funds. Permission to invest in ETIs is not a requirement to invest in ETIs. Appropriate due diligence and documentation is still a requirement. Plan fiduciaries should appropriately consider factors that potentially influence risk and return. Fiduciaries are still responsible for maintaining records sufficient to demonstrate compliance with ERISA's fiduciary provisions. 14 Summary