The Department of Labor has issued a clarification on previous ERISA (that’s short for Employee Retirement Income Security Act) guidance that seems rather minor at a first glance but make no mistake, it is ground-breaking after all. In a nutshell: guidance issued in 2008 discouraged what we would now call “impact investment opportunities with competitive market returns” for retirement accounts because of the perception that those could not be compatible with fiduciary obligations under ERISA. So far, this guidance had been perceived that the fiduciary was expected to explicitly demonstrate equal returns of such impact investments compared to investments of the same risk profile because of a general perception that by default there must be a cost associated with impact investments.  This incremental due diligence to explicitly demonstrate a comparable risk-return-profile would create incremental operating cost at the investment manager’s end, which is not compatible with fiduciary duty obligations. So, investment managers operating within the ERISA frameworks shied away from incorporating impact investment choices and research as it appeared to invite legal challenge by the opposition to impact investments. In his Oct 22 statement, Thomas Perez clarified that lower returns or higher risks versus benchmark choices remain unacceptable but that additional factors considered for choosing impact investments are proper components of a fiduciary’s analysis and thus not considered an extra cost.

Seems like a minor change, doesn’t it? Well, it is HUGE for at-market impact investment opportunities and environmental, social and governance factor due diligence, which can now expand into this $14 trillion of the global investment universe.