Socially conscious investing blossoms with DOL’s blessing

Ten years after the Department of Labor gave its blessing to socially conscious investments in defined contribution plans, the area finally has come of age.

Some $1.88 trillion in assets were held in socially screened separate accounts managed for institutional clients as of yearend 2006 — the most recent data available.

That is up 27% from $1.49 trillion in 2004, according to a survey by the Social Investment Forum, a Washington-based national organization dedicated to advancing socially and environmentally conscious investing. At yearend 1996, the total was $433 billion.

But 10 years ago, socially conscious investments weren’t generally accepted by many trustees and consultants, who worried that they would run afoul of the Employee Retirement Income Security Act’s requirement that plan assets be invested for the exclusive benefit of plan participants.

William M. Tartikoff, chief counsel at Calvert Group Ltd. of Bethesda, Md., thought this attitude needed to change, and requested an advisory opinion from the Labor Department.

In a May 28, 1998, response, the Labor Department advised Calvert that the fiduciary standards of ERISA didn’t preclude socially screened funds as long as “the investment was expected to provide an investment return commensurate to investments having similar risks.”

“We were very, very happy to get this letter,” Mr. Tartikoff said. “Now, 10 years later, we don’t have to show it to anyone anymore.”

While many experts agree that the letter has led to growth in the number of institutions that provide socially screened options to employees, that growth hasn’t been stratospheric.

“I think [the letter] has made some difference. It certainly is a resource for consultants like ourselves, fund managers, trustees and plan sponsors to look at when they’re looking to adding an [socially conscious investment] fund,” said Craig Metrick, U.S. head of Mercer LLC’s socially conscious investment team in New York.

“But not 100% of plan sponsors are convinced,” he said.

Mercer is a unit of New York-based Marsh & McLennan Cos. Inc.

Mr. Metrick said that many of the plan sponsors and trustees with whom he speaks still harbor performance concerns about socially conscious investment strategies’ performance and don’t want to be in the position of having to define what is “socially responsible.” In addition, some trustees fret that a portfolio company’s socially conscious status might go in and out of favor.

“What is the risk there?” Mr. Metrick said.

However, socially conscious investing appears to be becoming mainstream. Mercer officials said that they will start screening all 2,700 active managers in its global database to the extent that they integrate environmental, social and governance factors in their investment process.

A June 2007 survey of 129 DC plan sponsors released by the Social Investment Forum and Mercer found that 19% already had an socially conscious investing option, and an additional 41% planned to add one over the next three years. Mr. Metrick didn’t have any more recent data, but “from where I sit, we’re certainly seeing a greater frequency in inquiries,” he said.

Calvert has seen significant growth in the past 10 years. At the time the advisory opinion was released, the firm managed eight socially screened funds with a total of $1.8 billion in assets.

As of May 31, the firm managed 21 socially screened funds with total assets of $6.6 billion.

“I think we’re just at the tip of the iceberg,” Mr. Tartikoff said. “Ten years from now, I think we’ll see a huge increase in that number.”

One company that offers a socially conscious mutual fund in its 401(k) lineup is General Motors Corp. of Detroit. Spokeswoman Deborah Silverman said the company offers the Neuberger Berman Socially Responsible Funds in its $20 billion plan.

It previously offered several other funds, including Domini Social Equity, from Domini Social Investments LLC of Boston, but they were eliminated in July 2007, she said. Company officials made the decision to offer only the New York-based Neuberger Berman funds because they were the best-performing.

“Our goal is to provide a broad array of strong investment alternatives to our plan participants,” Ms. Silverman wrote in an e-mail.

“We offer our plan participants a variety of investment options that allow them to make investment decisions that reflect their personal investing goals and objectives,” she wrote. “Offering an SRI fund is part of that equation.”

Ms. Silverman said that about $41 million, or about 0.2%, of GM’s savings plan assets are invested in the Neuberger Berman funds.

“While the investment is relatively a small percent of the total savings plan assets, it still is an important investment option in the plan, which meets the needs of a number of our plan participants.” she said.

Jennifer Byrd is a reporter at sister publication Pensions & Investments.