Major Investors Blast DOL’s ESG Rule, Propose Big Changes or Withdrawal
Several major investment managers have published blistering criticisms of the U.S. Department of Labor’s (DOL) proposed new rule that would put stricter limits on ESG investing in private employer-sponsored retirement plans.
The primary purpose of the new rule is to ensure that plan fiduciaries focus on financial objectives in their decision-making process, and not sacrifice performance for non-financial considerations. Specifically, the new rule would “make clear that ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives,” according to a DOL statement.
Many investors and other stakeholders have published very strong criticisms of the proposed rule during the DOL’s comment period. ESG Today has selected a few of the comments to highlight investors’ views of the rules shortcomings.
The most common and significant criticism leveled at the DOL is that its new proposal would have the opposite of its stated intended effect, and end up hurting investors’ financial interests, exposing them to unnecessary risk and potentially harming returns. BlackRock’s Barbara Novick, Anne Ackerley, Brian Deese, and Nicole Rosser wrote:
“The Proposal creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially material ESG factors, regardless of their potential effect on the return and risk of an investment. We encourage the DoL to address these consequences before moving forward with any final regulation.”
Many commenters criticized the DOL’s assumptions regarding ESG investing as being out of date, and ignoring the positive effects on risk and return that integration of such factors into the investment process has been demonstrated to have.
Nikita Singhal, and Jennifer Anderson from Lazard Asset Management wrote:
“The Proposed Release appears not to be founded upon the most current research, and is instead based on negative assumptions about the impact of ESG considerations on investment outcomes. As set forth in this comment letter, LAM believes that ESG considerations can help manage investment risks and propel investment returns. Due to its flawed assumptions, we believe that the Proposed Release would impose unnecessary restrictions and burdens on plan fiduciaries considering the addition of ESG investment options to ERISA-regulated retirement plans. We further believe that the proposed rule, if adopted, would be detrimental to the long-term investment returns experienced by qualified plan participants and their beneficiaries.”
Lazard’s letter went on to cite specific research indicating the long-term benefits of ESG integration in the investing process, including:
“Research has shown that the stock prices of issuers that score high on sustainability considerations, and that successfully manage material environmental and social risks and opportunities, have generally outperformed others over the long-term. A recent analysis of data from MSCI shows how the ESG considerations cumulatively contributed 1.88% to the top 20 ESG funds’ returns over the last ten years, with more than 80% of that return occurring in the last four years of the study period.”
Other significant criticisms included the lack of clarity of the proposed rule regarding specific definitions of ESG investing, arguing that the DOL’s ambiguity would make it difficult for fiduciaries to align themselves with the rule when considering a wide variety of risks that could materially impact investments. Several argued that the rule would remove investors’ flexibility to choose to avoid many of these risks.
James Barr Haines of Fidelity Investments wrote:
“The Proposal’s attempts to “single out” ESG investing as being subject to special requirements and constraints, without defining ESG investing, is inconsistent with the statutory framework of ERISA and its promulgated regulations over the past 46 years. Moreover, the Proposal’s prescriptive approach lacks clear definition of key factors fiduciaries are to consider and the investment strategies to which such factors are to apply.”
Vanguard’s John James wrote:
“Plan fiduciaries should prioritize pecuniary considerations in selecting plan investments because a steady focus on long-term investment returns improves the likelihood of investment success. We firmly believe, however, that investors should have the choice to avoid investment risks they would prefer not to take, including risks associated with environmental, social, and governance (ESG) considerations. We are concerned that the Proposal would reduce the ability of investors to manage risks in their portfolio by constraining access to ESG investment options.”
State Street Global Advisors’ letter by Lori Heinel, and Katherine S. McKinley summed up many of these issues, and urged the DOL to withdraw the proposed rule:
“We believe that addressing material ESG issues is good business practice and essential to a company’s long-term financial performance — a matter of value, not values — and we seek to capture these drivers of long-term shareholder value for our clients.
“While considering material ESG factors in investment strategies provides benefits for investors, the Department’s proposal unfortunately discourages such integration by U.S. private sector plan fiduciaries, potentially disadvantaging plans, participants and beneficiaries by restricting access to an entire type of long-term, value-driven investment that could help ensure future retirement security.
“We believe such an outcome is clearly contrary to the purposes of ERISA. Therefore, we urge the Department to withdraw the proposed rule, and instead engage with the broad range of stakeholders — plan sponsors, investment advisers and managers, advocates for plan participants and beneficiaries, and other groups — to develop forward-looking approaches to incorporating the benefits of value-driven consideration of ESG factors into U.S. pension plans’ investment strategies.”