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Posts by: Helen Pennock

U.S. Department of Labor Releases Guidance on Consideration of ESG Factors for ERISA Plan Fiduciaries


On April 23, 2018, the U.S. Department of Labor issued Field Assistance Bulletin No. 2018-1, which provides guidance on environmental, social and governance (“ESG“) issues.

The Bulletin’s stated purpose is to provide guidance to the Employee Benefits Security Administration’s to assist in addressing questions they may receive from ERISA plan fiduciaries and other interested stakeholders about two previous DOL bulletins, Interpretive Bulletin 2016-1 relating to exercise of shareholder rights and written statements of investment policy, and Interpretive Bulletin 2015-01 relating to “economically targeted investments.” The Bulletin notes that the DOL has a longstanding position that ERISA fiduciaries cannot sacrifice investment return or take on additional investment risk as a means of promoting collateral social policy goals. The Bulletin states that ERIS fiduciaries must always put the economic interests of the ERISA plan first in making investment decisions, and that fiduciaries “must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.” The Bulletin also notes that ESG issues could constitute material business risk or opportunities to companies that would be treated as economic considerations under generally accepted investment theories, and that to the extent ESG factors involve business risks or opportunities that are properly treated as economic considerations in evaluating alternative investments, the weight that the fiduciary gives to those factors should be “appropriate to the relative level of risk and return involved compared to other relevant economic factors.”

IRS and Treasury Announce First Opportunity Zone Designations


On April 9, 2018, the U.S. Treasury and the IRS designated the first “qualified opportunity zones” in 18 states. A list of the designated opportunity zones is available here.

The U.S. Tax Cuts and Jobs Act (the “Act“), signed into law on December 22, 2017, created a process to designate certain low-income community census tracts as “qualified opportunity zones.” Investments in opportunity zones receive preferential tax treatment. The provision is designed to encourage investment in these low-income areas.  States were required to nominate low-income communities to be designated as qualified opportunity zones, or request a 30-day extension to submit the nominations, by March 21. The U.S. Treasury then has 30 days from the submission date to approve the designations. On April 9, the designations for all states that submitted by the March 21 deadline were announced.

Under the Act, the designated opportunity zones will retain the designation for 10 years. Tax on prior gains can be deferred until no later than December 31, 2026, so long as the gain is reinvested in a “qualified opportunity fund”, an investment vehicle organized to make investments in qualified opportunity zones. In addition, if an investor holds an investment in an opportunity fund for at least 10 years, the investor is eligible for an increase in its basis. According to the U.S. Treasury press release announcing the first designated opportunity zones, U.S. Treasury and the IRS plan to issue additional information on the certification of opportunity funds under the Act.

EC Releases Action Plan on Sustainable Finance

On March 8, 2018, the European Commission (“EC“) released an Action Plan on sustainable finance. The goal of the Action Plan is to provide a strategy on sustainable finance for the EU, and in particular to reorient capital toward sustainable investment, manage financial risks stemming from climate change, natural disasters, environmental degradation and social issues; and foster transparency and long-termism in financial and economic activity. The Action Plan builds on the priorities identified in the final report published in 2018 by the EU High-Level Expert Group on Sustainable Finance.

The key actions proposed in the Action Plan are: creating a unified classification system for sustainability, identified as the most important action of the Action Plan; creating standards and labels for green financial projects; clarifying duties of investment managers such as pension funds, insurance companies and asset managers to ensure they consider environmental, social and governance issues in investment decisions; incorporating sustainability in capital requirements for banks and insurance companies; and strengthening issuers’ sustainability disclosure and improving accounting rule-making to ensure accounting rules do not discourage sustainable investment. The Action Plan includes a timetable for all actions to be taken by the second quarter of 2019, and the first identified action is the tabling by the Commission of a legislative proposal in the second quarter of 2018 that will include tools allowing for the establishment of a sustainability classification system.

The European Commission’s press release announcing the publication of the Action Plan is available here and includes links to the full Action Plan, an FAQ document and a summary memo.

Bill Introduced to Create New U.S. Development Finance Agency

On February 28, 2018, a bipartisan bill was introduced in the U.S. Congress that would create a new, expanded U.S. development finance agency.  The bill, titled the Better Utilization of Investment Leading to Development, or BUILD Act, would create a new agency called the U.S. International Development Finance Corporation which would replace OPIC and would also take over some functions of USAID.  The bill was introduced simultaneously in the House by Republican and Democratic representatives and in the Senate by Republican and Democratic senators.

The bill would give the new agency additional powers that OPIC does not currently have and would also increase the amount of investment that can be made.  Under the bill, the maximum contingent liability of the new agency would be increased to $29 billion from OPIC’s current cap of $60 billion and would be adjusted regularly based on inflation.  In addition to providing loans and insurance, the new agency would have the power to make equity investments and make grants, neither of which OPIC has authority to do.  The bill would also move USAID’s Development Credit Authority, enterprise funds and Office of Private Capital and Microenterprise into the new agency.

The bill as introduced in the senate is available here.

U.S. Pay-for-Results Funding


The U.S. budget bill enacted on February 9, 2018 provides funding for states and localities for pay-for-success projects and feasibility studies. Title VIII of the bill, titled “Supporting Social Impact Partnerships to Pay for Results,” authorizes the U.S. Treasury to award $100 million of competitive funding to states and local governments for “social impact partnership projects” that “produce one or more measurable, clearly defined outcomes that result in social benefit and Federal, State, or local savings.” The legislation also provides for up to $10 million of the total available funding to be awarded for feasibility studies to apply for project funding. READ MORE

Final Report by EC Expert Group on Sustainable Finance


On January 31, 2018, the European Commission (“EC“), published the final report of its high-level expert group (“HLEG“) on sustainable finance. A copy of the report can be found here.

The HLEG was established to help develop an overarching EU roadmap on sustainable finance and to give advice on how to steer more capital flow toward sustainable investments, identify steps that financial institutions and supervisors should take to protect the financial system from sustainability risks, and apply these policies on a pan-EU scale.

The HLEG recommended a number of actions, including the following, which were considered priority actions:

  • Establish a classification system (or taxonomy), starting with climate mitigation, to establish market clarity on what is “sustainable”;
  • Clarify investor duties and bring greater focus on environmental, social and governance (ESG) factors when making investment decisions;
  • Improve disclosure by financial institutions and companies to make sustainable opportunities and risks transparent;
  • Develop official EU sustainability standards for some financial assets, starting with green bonds; and
  • Integrate sustainability in financial institutions’ governance as well as in financial supervision.

On February 1, 2018,the European Commission published two annexes to the HLEG’s report, the ‘Informal supplementary document on green bonds’ (available here) and ‘Summary of the contributions to the HLEG on sustainable finance consultation document’ (available here).