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Oct 25, 2015

US pension funds get ESG green light

New guidelines to allow investors with $8.4 tn in assets to target sustainable investment

The US Department of Labor has rescinded a 2008 bulletin that discouraged private industry pension plans from taking ESG factors into consideration when deciding where to invest their money.

The pension plans and other investors governed by the Employee Retirement Income Security Act of 1974 (ERISA) will be able to fully integrate ESG issues into their investment decisions when the new guidelines are issued, said Thomas Perez, the US labor secretary at a press conference held jointly with Morgan Stanley, Trillium Asset Management and the Forum for Sustainable and Responsible Investment.

The guidance will essentially overturn guidelines issued in 2008 that prevented approximately $8.4 tn in defined benefit and defined contribution plans from opting to invest in companies and funds that take into consideration ESG factors when making investment.

The move ‘enables investment professionals to exercise their judgment and expertise in the service of beneficiaries without concerns about possible conflicts with ERISA,’ Lisa Woll, chief executive of the US SIF Forum for Sustainable and Responsible Investment, which promotes ESG investment, says in a press release. ‘It clearly signals that ERISA-governed plans, and by extension, those plans influenced by ERISA, may integrate critical ESG issues into their investment decisions.’

According to US SIF data, investments by institutional investors and investment firms in the US that take ESG factors into consideration jumped 76 percent between 2012 and 2014 to $6.6 tn as investors and companies ‘increasingly understand that ESG issues and risks are important considerations in creating long-term value.’

Morgan Stanley also welcomed the decision, saying it will ‘provide a major boost for sustainable investment’.

‘Integrating ESG considerations into investment decisions can enhance an investor's abilities to identify material risks and opportunities,’ says Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing. The ‘announcement from the Department of Labor opens the door for investors to think strategically about their long-term positions with a far richer data set, consistent with their fiduciary duty.’