Pension plan sponsors could be forgiven for having whiplash whenit comes to the Department of Labor's tone on environmental,social, and governance (ESG) matters.

Over the years, the DOL's publications on incorporating ESGfunds into plans subject to the Employee Retirement Income SecurityAct (ERISA) have flipped from positive to negative, and back again.The most recent guidance seems to skew toward the negative.

In a Field Assistance Bulletin published April 23,John Canary, director of regulations and interpretations, tellsERISA enforcement field officers that “fiduciaries must not tooreadily treat ESG factors as economically relevant” when choosinginvestment products for plan participants. He continues: “It doesnot ineluctably follow from the fact that an investment promotesESG factors, or that it arguably promotes positive general markettrends or industry growth, that the investment is a prudent choicefor retirement or other investors. Rather, ERISA fiduciaries mustalways put first the economic interests of the plan in providingretirement benefits.”

While the bulletin does not overtly reverse previous statementsfrom the DOL, and in essence restates an abiding emphasis oninvestment performance and costs as paramount considerations forfiduciaries, the phrase “must not too readily” will likely giveplan sponsors pause, says Kenneth Raskin, chairman of the PlanSponsor Council of America (PSCA) and a partner at law firm King& Spalding. With this most recent guidance, Raskin says, “it'sjust a little more difficult for a fiduciary to go down that road.It doesn't help fiduciaries invest in ESGs.”

The data show that sponsors already are leery. In 2016, ESGfunds were an option in just 2.4 percent of retirement benefitplans, according to a PSCA survey of 590 plan sponsorspublished earlier this year.

“There's already not a lot of interest in this” on the part ofplan sponsors, Raskin notes.

The April 23 guidance is especially firm when it comes to thequestion of ESG-themed investments as qualified default investmentalternatives (QDIAs). “Nothing in the QDIA regulation suggests thatfiduciaries should choose QDIAs based on collateral public policygoals,” the guidance warns.

Alex Bernhardt, head of responsible investment U.S. at Mercer,agrees that the ERISA guidance is likely to have a chilling effecton plan sponsors. But, he adds, it was already clear from existingemployment law and regulation that due diligence is paramount forfiduciaries, no matter what style of investments they areconsidering for participants. “The process is the same andsimilarly robust,” Bernhardt says.

The recent guidance serves as a reminder of that process, nomatter the type of investment product. “The emphasis on duediligence has been heightened,” Bernhardt says. At the same time,“responsible investing isn't going away.” The United Nations' Principlesfor Responsible Investment has more than 1,000 signatories,accounting for over $70 trillion in assets. Investment managersworldwide are interested in ESG factors. So are ratings agencies.

Some see a different overarching message in the April DOLguidance: ESG factors are, in fact, economic measures worthy ofcareful consideration, which should absolutely be taken intoaccount when performing due diligence as a fiduciary. Susan Gary, aprofessor at the University of Oregon School of Law and author of arecent paper, “Best Interests in the Long Term: Fiduciary Dutiesand ESG Investing,” published in the University of Colorado LawReview, views the DOL's guidance as “confirmation of the potentialimportance of ESG factors” and says that she found the missive“interesting and helpful.”

Gary points to a key passage in the guidance where, in her view,the DOL reiterates its previous view that there “could be instanceswhen otherwise collateral ESG issues present material business riskor opportunities to companies that company officers and directorsneed to manage as part of the company's business plan and thatqualified investment professionals would treat as economicconsiderations under generally accepted investment theories.

“In such situations,” the DOL guidance continues, “theseordinarily collateral issues are themselves appropriate economicconsiderations, and thus should be considered by a prudentfiduciary along with other relevant economic factors to evaluatethe risk and return profiles of alternative investments.”

Gary views this statement as a sign the DOL recognizes that ESGfactors are indeed potentially material to investment performance.“When material ESG factors do have financial impact, they should beconsidered by a prudent fiduciary, and the guidance confirms thisunderstanding of the prudent investor standard,” Gary writes.

Plan sponsors may not share her perspective, but by issuingadditional guidance that does not negate prior doctrine, the DOLhas succeeded in keeping ESG factors top-of-mind for a variety ofstakeholders.