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Democratic Lawmakers, Pension Funds, Others Blast Labor Department’s ESG Investing Curbs

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Bill Flook

Democratic lawmakers, pension funds, and others railed in comment letters against a Department of Labor proposal seeking to curb environmental, social, and governance (EGS) investments by retirement plan fiduciaries.

The DOL proposal, issued June 23, 2020, seeks to discourage fiduciaries from putting investment returns behind other non-financial considerations, arguing that “providing a secure retirement for American workers is the paramount, and eminently-worthy, ‘social’ goal” of plans under the Employee Retirement Income Security Act (ERISA).

The proposal, titled “Financial Factors in Selecting Plan Investments,” has so far garnered 1,100 comment letters. Among those critical of the proposal are the AFL-CIO, Montgomery County (Md.) Employee Retirement Plans, the California State Teachers’ Retirement System (CalSTRS), Fidelity Investments, and a group of Senate Democrats that includes Sens. Elizabeth Warren of Massachusetts, Patty Murray of Washington, and Sherrod Brown of Ohio. Brown is the ranking member of the Senate Banking Committee.

“This rushed and out-of-touch proposal relies on speculation rather than evidence to justify its misguided approach and would undermine fiduciaries’ ability to consider all available information and make sound investments,” the senators wrote in their July 30 letter.

The proposal comes amid a broader debate over the rise of ESG investment vehicles that maintain social responsibility goals alongside financial ones. At the same time, investors are increasingly pushing public companies to make more detailed ESG disclosures on such items as climate change risk and political spending transparency, while industry groups say the information is not material to investment decisions.

The DOL, in its proposal, acknowledged that public companies and their investors “may legitimately and properly pursue a broad range of objectives, subject to the disclosure requirements and other requirements of the securities laws,” but pension plans under ERISA are bound by statute to a more narrow objective of maximizing the funds available to pay retirement benefits.

The agency wrote that it is “concerned” that an increased emphasis on ESG investing may be leading ERISA plan fiduciaries to make decisions “for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.”

“This proposed regulation is designed in part to 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-pecuniary objectives,” the DOL stated in the proposal. “The duty of loyalty—a bedrock principle of ERISA, with deep roots in the common law of trusts— requires those serving as fiduciaries to act with a single-minded focus on the interests of beneficiaries.”

Supporters of the DOL proposal include the U.S. Chamber of Commerce, which in a July 30 letter praised the agency for its work to “clarify through formal notice and comment rulemaking the duties of prudence and loyalty in the context of a fiduciary’s investment duties.”

But critics rejected the notion that investing with an ESG focus would inherently jeopardize returns, or that ESG factors were not material.

CalSTRS, in its July 30 letter, wrote that “in addition to traditional financial metrics, timely consideration of material environmental, social, and governance (ESG), factors in the investment process for every asset class, has the potential, over the long-term, to positively impact investment returns and help to better manage risks.”

Some comment letters, like Fidelity’s July 30 letter, pointed to climate risk as potentially material to financial returns. Fidelity warned that, on climate, the DOL proposal “puts fiduciaries between a rock and a hard place.”

“By assuming environmental, social or corporate governance considerations are nonpecuniary, the Proposal appears to suggest that plan fiduciaries should disregard the pecuniary factors now incorporated by asset managers globally in their investment process to assess both long- and short-term investment risk in selecting underlying securities for any prudent portfolio.”


This article originally appeared in the August 17, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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