The Department of Labor made it easier on Thursday to utilize socially responsible investment strategies in retirement plans covered by the Employee Retirement Income Security Act.
In a guidance posted Thursday, the Labor Department said that it's now perfectly acceptable for retirement plans to consider investment products that take into consideration social impact.
“If you could demonstrate that you weren't compromising on financial performance, you could pursue other goals as well,” Labor Secretary Thomas Perez said. "Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand."
The guidance is a reversal from the Department’s 2008 ruling that “unduly discouraged” fiduciaries from considering environmental, social and governance factors, when appropriate, in making investment recommendations, the agency said.
"Changes in the financial markets since that time, particularly improved metrics and tools allowing for better analyses of investments, make this the right time to clarify our position," Perez said Thursday.
The new guidance was applauded by the industry as well as organizations such as the Ford Foundation. Specifically, Morgan Stanley said in a statement Thursday that the Labor Department’s revised stance provided a major boost for sustainable investing, a key mechanism for directing private capital at scale toward global social and environmental challenges.
“Prudent investors want to make investment decisions using as much materially relevant information available to them as possible,” said Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing. “Our work at Morgan Stanley has found that a large number of investors want to invest for both social impact and financial return, and today’s announcement will enable Americans saving for retirement to more easily do exactly that.”
Of course, Thursday’s guidance does not mean that the financial health of retirement plans can be compromised—that remains paramount. Those issuing recommendations still cannot accept lower returns or incur greater risks in the name of collateral benefits.