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Takeaways for Plans and Asset Managers

Although the FAB does not change the legal principles or framework governing plan participation in ESG investments, it does offer some helpful points for plans and asset managers to consider:

• Asset managers should consider how their ESG products are marketed. It may be easier for a plan fiduciary to select an ESG investment that emphasizes the financial and return aspects of its ESG activities than one that emphasizes the potential social benefits of impact investing.
• Asset managers should review how they characterize the risks of investing in any ESG-oriented or ESG-informed products they manage. In particular, the characterization of lower potential returns might be couched in a manner that provides both adequate warning to investors and sufficient clarity that there is no conscious sacrifice of economic merits to inappropriate collateral considerations.
• Even though the preamble to IB 2015-01 stated that the DOL does not think a plan fiduciary’s consideration of ESG criteria requires additional documentation, the tone of the FAB suggests that plan fiduciaries should consider maintaining enhanced records regarding the decision to invest into an ESG product.
• Plan fiduciaries should be explicit regarding whether they are considering the ESG features of a product as economic or non-economic factors.

Takeaways for Public Companies

• For public companies, the short answer is that the FAB is unlikely to have an effect on corporate “E&S” initiatives or the velocity of change in this space.
• The shareholder engagement guidance in the FAB may result in a modest decrease in E&S shareholder proposals, although it is likely that other investors will fill any void left by plan asset investors. Otherwise, plan asset investors are just one factor driving E&S. E&S also is being driven by business sustainability considerations as well as pressures from non-plan asset investors, non-shareholder stakeholders, including NGOs, commercial customers, consumers and states’ attorneys general, as well as other factors. For a more extensive discussion of some of these factors, see our recent Alert here.