When it comes to the field of impact investing, even small changes in how a policy is worded can have big implications. On October 22, a seemingly minute change was made to a U.S. Department of Labor bulletin regulating pension funds governed by the Employee Retirement Income Security Act (ERISA). But this small change could unleash large amounts of pension fund dollars for social good.
Since The Rockefeller Foundation coined the term ’impact investing‘ in 2007, there’s been a growing recognition of the potential for targeted investments to generate both financial and social or environmental impact. However, in 2008, a deceptively simple change was made in the wording of the Department of Labor’s guidance governing pension fund investments. This rewording restricted the ability of those funds to take environmental, social, and governance factors into account when making investments.
As US Secretary of Labor Thomas E. Perez explained, “we have heard from stakeholders that a 2008 department interpretation has unduly discouraged plan fiduciaries from considering economically targeted investments.” Thanks to the October 22 decision, Perez has now announced that, “investing in the best interests of a retirement plan and in the growth of a community can go hand in hand” once again.
“Investing in the best interests of a retirement plan and in the growth of a community can go hand in hand”
These new guidelines have the potential to positively impact the millions of Americans whose pension plans are regulated by ERISA, as well as to generate tremendous social and environmental change for them and their communities. The guidelines now allow fiduciaries to consider environmental, social, and governance factors when deciding between competing investments of similar expected return. Driving even a small portion of the trillions of ERISA-regulated capital to take such impact into account will have tremendous societal impact.
As one of the first program-related investors (PRI), The Rockefeller Foundation is thrilled to join our colleagues in the impact investing sphere in celebrating this development—the grounds of which have been carefully laid over recent years. With a significant grantmaking program focused on bolstering the enabling environment for impact investing, we have been firmly committed to the belief that impact investments have the power to create lasting change, and convinced that policy reform is essential to do so.
Policy changes such as those we have seen over the past month indicate a larger shift in the culture of investing. Increasingly, savvy investors see investments as more than just opportunities for immediate financial return. In the words of Audrey Choi, CEO of the Morgan Stanley Institute for Sustainable Investing, “prudent investors want to make investment decisions using as much materially relevant information available to them as possible.” As the definition of a ‘prudent’ investor broadens, pension fund managers will invest in more than just the financial future of America’s retirees—they will invest in our nation’s future as well.