Pension Funds Considering Fossil Fuel Divestment, Socially Responsible Investments Get Boost From Labor Department

The U.S. Department of Labor has withdrawn an arcane George W. Bush-era measure that critics say discouraged pension trustees from making socially responsible investment decisions -- like divesting from energy companies that contribute to climate change. The move could intensify environmental groups' efforts to try to starve fossil-fuel corporations of billions of dollars worth of capital from institutional investors.

Last week, Labor Department officials unveiled a new interpretive guidance that Labor Secretary Thomas Perez said would ensure that “investing in the best interest of a retirement plan and in the growth of a community can go hand in hand.” The update could give legal “wiggle room” to pension trustees inclined to make socially guided investments but who may have feared running afoul of fiduciary standards designed to maximize low-risk returns, says David Webber, a law professor at Boston University.

Under the old guidance, which was issued in the waning months of the Bush administration at the urging of business groups, socially inclined trustees may have felt “a target on their backs,” Webber says. The previous measure called on pension trustees to observe a relatively narrow, returns-trumps-all standard for making certain investments. It even specifically said that pension trustees “may not simply consider investments only in green companies.”

Long-standing law still requires trustees to consider financial returns and risk over any other social, environmental or political considerations. But the new guidance stresses that “environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment.” That language is critical, says Ian Lanoff, a lawyer who serves as counsel to some of the nation’s largest public and private pension funds: It explicitly acknowledges that fiduciaries can consider environmental factors as part of their overall economic calculus.

The guidance does not technically apply to state or local plans -- but as an “interpretive bulletin,” it sets widely followed fiduciary standards. Advocates for fossil-fuel divestment are calling the new guidance a “game changer.”

“Institutions often push back against divestment by citing their fiduciary duty to maximize profit at all cost,” says Jamie Henn, strategy and communications director and co-founder of 350.org, an environmental nonprofit that has called on pension funds and universities worldwide to bail from their holdings in coal, oil and gas. “These new guidelines clearly state that ethical considerations are completely compatible with fiduciary duty. More importantly, they note that environmental considerations are key to judging an investment's long-term financial value.”

While California’s two largest public pension funds only recently moved to divest their holdings in coal, similar proposals have stalled elsewhere, in part out of concern over breaching fiduciary duty. In August, a committee overseeing Vermont's state pension trust rejected divestment from part or all of its fossil-fuel holdings because it “was not consistent with its fiduciary duty to plan participants.”

State legislators in recent years have pushed bills to force trustees to divest from fossil-fuel holdings. The new guidance could reassure skeptical pension trustees they’re in the clear from a legal perspective, according to Webber.

“The rationale can’t be, ‘We hate coal, we’re dumping it,’” Webber says, “but to the extent you can take into account the financial harm in the long run, it might give more flexibility to reallocate the portfolio.”

The measure could also enhance the ability of trustees to make targeted investments that benefit their political allies -- so long as the low-risk financial returns exist. Earlier this month, for example, five New York City employee retirement funds announced they would invest $150 million in the AFL-CIO Housing Investment Trust. The group is committed to building affordable housing with union labor.

In that case, cheap housing and good-paying jobs are both cast as key benefits of the investment -- rather than financial returns alone.

Dan Pedrotty is director of pensions and capital strategies at the American Federation of Teachers, one of the nation’s largest unions. He says the 2008 guidance had blocked pension officials from trying to make sure investments reflected the political and social values of public employees.

“Having sat in boardrooms with trustees, I think it’s had a chilling effect,” he says.

The teachers’ union has criticized certain hedge-fund managers for supporting groups and causes opposed to traditional teachers’ pensions. Likewise, it has published reports naming names and encouraged trustees to look into the political backgrounds of asset managers. The new guidance could strengthen the ability of union-tied trustees to steer clear of certain funds that, in effect, are funding the demise of their beneficiaries’ plans. This is especially the case at a time when many hedge funds have failed to produce returns that outpace the overall stock market.

James Sherk, a research fellow in labor economics at the conservative Heritage Foundation, considers the new measure a disservice to workers. “Allowing unions to use their members’ pensions to pursue political objectives opens the door to serious abuses,” he says.

But Pedrotty says there’s no evidence of wrongdoing or any harm to retirees. Moreover, by focusing on socially targeted investments, the guidance merely defends a trend that’s already gaining traction among investors. “This is mainstream now,” he says.