Janine Guillot, CEO of the Sustainability Accounting Standards Board (SASB) has published a letter sent to U.S. Secretary of Labor Eugene Scalia, in response to the Department of Labor’s (DOL) recent proposal to put stricter limits on ESG investing in private employer-sponsored retirement plans. The letter urges the DOL to withdraw the proposal.
SASB is an independent non-profit organization, with the mission to establish industry-specific ESG disclosure standards for companies. The standards set by SASB are designed to enable investors to assess the materiality of reported sustainability information, and to compare companies on these metrics on a global basis. SASB’s standards are increasingly being adopted by companies in their ESG reporting efforts, with several large investors, including BlackRock, requesting issuers to adopt the standards.
The primary stated purpose of the DOL’s proposed 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.
In her letter, Guillot criticizes the DOL’s proposal as “off-the-mark” in its assessment of ESG investing as potentially contrary to fiduciary interests. In particular, Guillot highlights the financial materiality of ESG factors in the investing process, citing numerous studies confirming that such factors can, in fact, “be material to a company’s operating performance, financial condition, credit risk profile, and/or stock performance.”
Guillot goes on to question the DOL’s motivation in releasing its new proposal, suggesting that the move is being interpreted as an attempt to slow the momentum of ESG investing:
“Why, given the evidence of financial materiality found by SASB and numerous scholars, would ESG investing be singled out by DOL for a special rule, a special documentation requirement, and a “heightened” level of scrutiny? The DOL’s pejorative treatment of ESG investing seems designed to tamp down on such activity despite the materiality assessments reached by SASB and other experts in this area. That is, indeed, the way that the Proposal is being broadly interpreted.”
She goes on to point out that the rule may have the opposite effect of its stated purpose, and be harmful to investors, writing:
“The end result of the DOL’s Proposal would be harmful, rather than beneficial, to plan beneficiaries. And because the Release fails to offer an evidentiary basis for its approach, the efficacy of the Proposal under an arbitrary and capricious standard of administrative rulemaking would be seriously in doubt.”
Finally, the letter points to other problematic aspects of the DOL proposal, particularly the confusion it could create over the rule’s definitions of pecuniary and non-pecuniary factors. The letter questions whether a plan fiduciary would be permitted under the new rule to even consider long-term investment factors, as many ESG issues become apparent over longer time horizons.
The DOL proposal has met with significant criticism from many other significant figures in the sustainable investing community as well. Yesterday, John Hale, Morningstar’s Global Head of Sustainability Research published a critique of the proposal, arguing, among other things, that the DOL’s thinking was outdated and, similar to Guillot, that it ignores the materiality of ESG factors to investing outcomes. Hale wrote:
“The DOL is stuck in the 20th century, when the precursor to what we call ESG investing–socially responsible investing–was a niche investment approach practiced by relatively few investors who wanted to align their investments with their values. For some, these were religious values; for others, these were progressive values. In so doing, these funds excluded some portion of the market from their portfolios, and because these exclusions caused tracking error that sometimes led to underperformance, they were considered by many to be inferior investments, even though empirical research generally found no performance penalty.
“But two decades into the 21st century, that’s simply not what ESG investing is about. First, ESG investing is about investors carefully evaluating a set of risks and opportunities that are now both measurable and analyzable because of the existence of ESG data. Until the past decade or so, investors couldn’t manage ESG risks because they couldn’t measure them. Now they can. Second, ESG investing is about focusing on financially material ESG risks, which clearly exist today across a range of issues. The proposed rule mentions materiality only in passing, saying ESG factors may be material “but only if they present economic risks or opportunities that qualified investment professionals would treat as material,” then proceeds with its treatment of ESG investing as though it is only about delivering “collateral” benefits, earned at the possible expense of returns.”