david woodLast week, the Department of Labor announced that it was withdrawing a guidance memo from 2008 for ERISA plans on Economically Targeted Investments (ETIs), reverting instead to previous guidance issued in 1994. This move had been long sought by a substantial group of responsible investors, who shared the DOL’s concern that the 2008 guidance “unduly discouraged fiduciaries from considering ETIs and ESG factors” when making their investment decisions.

This is big news in the IRI’s neck of the woods. ERISA not only governs a sizable number of pension funds directly, but it has even broader impact as a touchstone for asset owners who aren’t subject to the legislation.

At the risk of a listicle, here are three things that I took away from the announcement:

  • The primary way to understand ERISA remains the same – plan fiduciaries must make their investment decisions prudently, and this means making sure that there is a process to determine that any investment is based on the plan’s goal of delivering benefits to beneficiaries. Nothing in the DOL announcement changes that fundamental obligation. The primary purpose of pension funds is to facilitate the payment of promised benefits, and their investments are a tool to fulfill this mission. If there is a change here, it is in the fact that the guidance has reverted to 1994’s focus on “participants and beneficiaries”—the stakeholders a fund is meant to serve, rather than “the economic interests of the plan”—as the immediate focus of an ERISA plan’s mission. Plan trustees should act in their beneficiaries’ interest.

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erin shackelford 2015Are so-called “too big to fail” banks an issue that investors should factor into their decision making? This is the topic we considered in the Trustee Leadership Forum for Retirement Security’s quarterly webinar series, held earlier this month. MIT Professor Simon Johnson and the AFL-CIO’s Director of the Office of Investment Heather Slavkin Corzo spoke to pension trustees about current risk-return considerations around bank consolidation and bank size.

TBTF banks are a good example of a long-term issue of embedded risk that responsible investment is designed to integrate into decision-making. Funds may view TBTF banks as good investments as individual pieces of a portfolio. However, investors who view investment decisions through a systemic, long-term lens may also view these banks as creating risk and volatility for the market as a whole, and potentially posing a risk to the economy, their communities, and/or the participants of their funds.

As a follow-up to the webinar, the TLF has produced a new resource on TBTF banks to assist pension trustees in thinking about the issue. The TLF “Note on Too Big to Fail Banks” provides an overview of the topic, questions that pension trustees might consider, ideas on how to approach integrating the issue into investment strategy, and a list of further reading.

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david feb 2013 smallOn September 15th, the IRS issued new guidance on mission investing by private foundations that clarified that foundations can use their endowments to further their mission without fear of incurring tax liabilities. The purpose of the guidance is to reassure mission investors that so long as they use a clear, prudent process for underwriting their investment decisions—don’t take unnecessary risks to the needs of executing the foundation’s mission, and so on—they can target social goals through their investments. Because they represent organizations with a specific public purpose, the IRS says, “foundation managers may consider all relevant facts and circumstances, including the relationship between a particular investment and the foundation’s charitable purpose” when making their decisions.

What does this new guidance mean for the field of mission investing? In the first place, it affirms what advocates have long argued: there is no reason why foundations shouldn’t be able to think about their social goals when making their decisions. There have been skeptics who argue that investing a private foundation’s endowment must look only to financial performance, regardless of the organization’s mission—this new guidance makes that argument that much harder to make.

But there’s another way to think about what the guidance means to the field. It reinforces the idea that there are ways to prudently invest with social goals in mind, and so offers support for the broad field of responsible (and impact, sustainable, social, etc.) investing. And for private foundations, it makes explicit the notion that endowments are not just captive pots of money, but are themselves potential tools with which to do things to improve the world. This is something of a break from the conventions of the recent past, in which finance has frequently been seen to be its own domain, disconnected from society and subject only to its own internal rules.

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