DOL Proposal Will Chill ESG Corporate Pension Investing, Advocates Say

The proposed federal rule takes a dim view of sustainable investing that’s not focused solely on returns.

Advocates of environmental, social, and governance (ESG) investing have decried the US Department of Labor (DOL)’s newest proposal as poison for sustainable investments in pension plans. 

On Tuesday, the DOL proposed a rule that said company defined benefit (DB) retirement plans have a fiduciary duty to beneficiaries, not to social causes advanced through ESG investing that could reduce returns or increase risk. 

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” Labor Secretary Eugene Scalia said in a statement. 

Scalia added: “Rather, ERISA [Employee Retirement Income Security Act] plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.” 

The proposal would only affect private employer plans, which have not been as active or outspoken about ESG investing as have some of their peers in endowments and foundations or in public pension funds. 

But ESG supporters say the proposal targets a growing trend in sustainable objectives, such as climate change and diversity, that they say do not run contrary to fiduciary considerations. 

“The DOL proposal is out of step with professional investment managers, who increasingly analyze ESG factors precisely because of risk, return, and fiduciary considerations,” the Forum for Sustainable and Responsible Investment (US SIF), an advocacy group, said Wednesday in a response

“Generating more hurdles to the incorporation of ESG criteria will have a chilling effect, leading to plan participants losing access to ESG options—many of which have outperformed their indices over time and especially during the market shock related to COVID-19,” the response continued. 

“You’re obliged as a fiduciary to take these issues into account, and the DOL is questioning whether you should do that,” said Tim Smith, director of ESG Shareholder Engagement at Boston Trust Walden. 

Experts say that the DOL may want to tamp a trend many have touted as the future of investing. At the start of this year, BlackRock CEO Larry Fink said in his influential annual letter to chief executives that his firm would make sustainability a core goal for investments

But that may have spooked the Department of Labor, which has urged caution to investors in the past against relying on ESG ratings or including ESG considerations in investment policies. If passed, the proposal could have far-reaching consequences on the broader industry, including ratings agencies and ESG products. 

“The Department of Labor is clearly worried that ESG is politicized and they’re worried that participants’ assets are jeopardized if plan fiduciaries are pursuing ESG investments for reasons other than investment performance,” said George Michael Gerstein, co-chair of fiduciary governance at Stradley Ronon Stevens and Young. 

Experts also say that public pension plan leaders should take note of the rule. The regulation and the preamble commentary could inform analysis on potential fiduciary breaches under state law. The proposal is currently open for a 30-day comment period.

“This is a fairly aggressive regulation proposal that could have a real, significant impact on the ESG industry,” Gerstein said. 

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