Last year ended with good news for socially responsible investors and shareholders interested in ESG issues. On December 28th, the Department of Labor issued an Interpretive Bulletin that reversed an Interpretive Bulletin from 2008. Furthermore, this 2008 Bulletin reversed an Interpretive Bulletin from 1994. The result is a favorable shuffle of opinion, which is explained in Interpretive Bulletin 2016-1.
Some might speculate about the timing of this bulletin in light of the incoming administration. Their theories might be inflated if they looked back to the release of the 2008 Bulletin, which was near the start of the Obama administration (that Bulletin reversed the Bulletin from 1994, as previously mentioned).
Regardless, DOL's Interpretive Bulletin 2016-1 frees or empowers ERISA plan fiduciaries to exercise certain shareholder rights, in particular those related to proxy voting policies. It gives ERISA plan fiduciaries, plan trustees or designated investment managers, confidence to vote proxies that would otherwise have put them in a position of questioning their fiduciary responsibility. Interpretive Bulletin 2016-1 builds upon its October 2015 opinion (IB 2015-1), which in combination give a further boost to ESG investing principles in ERISA-based plans.
Fiduciaries may now consider voting on proxies introduced by activist shareholders or initiated by themselves, many of which will connect to environmental, social, and governance issues. This presents the situation that in 2017, we will see more shareholder activism related to issues such as the appropriateness of executive compensation, corporate governance reforms, and climate change. Broadly, the Bulletin makes way for shareholder engagement on "non-financial measures of corporate performance."
It goes without saying that the economic impact of any investment-related action or decision made by a trustee trumps any other criteria. Now however, such decisions including those addressing non-financial measures of corporate performance, will not carry a burden of extreme validation protocol, which often includes well-documented and costly cost-benefit analyses. These analyses are not only highly discerning but the cost to complete them and the cost to engage with corporations whose financial instruments are held in the ERISA-based plan, were an additional disincentive to consider the proxies in question.
For ESG data providers, SRI investment managers, and shareholder service firms, this reaffirmed DOL opinion can offer new opportunities to bring the newest ESG data tools and services to plan investment committees. These tools and services are positioned by providers to bring focus to long-term investment approaches. This bodes well with the DOL as long-term holdings, long-term business plans, long-term financial benefits, and long-term shareholder value are all referenced in the Bulletin.
While the Bulletin might worry corporate council and raise the fear that it will encourage plan fiduciaries to engage in shareholder activism activities, the fact that shareholder activism has been increasing consistently leaves this possibility inconsequential. The same holds true for engagement directly with corporate management - it will continue to increase regardless of the new DOL interpretation. For SRI investors and shareholders interested in ESG issues, IB 2016-1 is a very good step forward.
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