It may seem like minutia to some, but new guidance issued by the U.S. Labor Department may open up additional impact or sustainability funds that can help tackle the challenge of development finance.
The change to the Employee Retirement Income Security Act of 1974 — a federal law that sets standards for pension and health plans — essentially removes a 2008 provision which was confusing, and had a chilling effect on impact and sustainable investing.
The new guidance aims to enable private pension fund managers to consider economic, environmental, social and governance concerns in addition to a financial return when making investments — a change that could unlock a significant source of capital for socially responsible businesses and funds.
“Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand,” said U.S. Secretary of Labor Thomas E. Perez in a statement.
“We have heard from stakeholders that a 2008 department interpretation has unduly discouraged plan fiduciaries from considering economically targeted investments. 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.”
For those in the industry, it’s been a long time coming. Indeed, many actors have been pushing for the change and it was among the U.S. National Advisory Board on Impact Investing’s top policy recommendations when it released its report in June 2014.
“I think that it has a lot of implications for international development,” said Tracy Palandjian, co-founder and CEO of Social Finance. She added that while the impact may not be direct, at least not at first, the effect on global supply chains, better labor and environmental practices and workers rights could be dramatic.
While it’s an exciting moment, according to Palandjian (who is also a co-chair of the National Advisory Board on Impact Investing) the change doesn’t provide incentives for impact investing — it is merely “lifting the thumb off of the scale to allow the market to restore that balance.”
Changes to ERISA in the late 1970s helped lead to the rapid expansion of venture capital markets. Whether this change will create a similar trajectory remains to be seen, she said.
Ultimately, pension funds will still need to undertake the same due diligence; investments will still require a track record and a proven financial return, but social and environmental factors can now be a part of that decision-making process.
So as funds and companies prove competitive returns and social or environmental benefits they now stand a better chance of gaining access to the U.S. pension market, which was valued at $24.6 trillion in 2014, according to PricewaterhouseCoopers.
That’s certainly no small change, but what remains to be seen is whether fund managers will indeed now look at these new factors when determining investments. Groups like the National Advisory Board and others will be working to raise awareness and help make that happen, Palandjian said.
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