ESG Rulemaking by DOL – comments are in. Several investor organizations and financial industry firms released an analysis of the more than 8,700 public comments on the Department of Labor’s (DOL) proposed rulemaking on the consideration of environmental, social and governance (ESG) considerations in ERISA-governed retirement plans. There is overwhelming opposition to the “Financial Factors in Selecting Plan Investments” proposal. Also, check out Wall Street Is Looting the American Retirement System. The Trump Administration Is Helping in Rolling Stone and The Rise of ESG in Passive Investing by US SIF.
ESG Rulemaking by DOL: Americans Want ESG Funds
As Jon Hale notes:
Sustainable funds have performed well relative to conventional funds amid the global pandemic. (link) Sustainable fund flows in the United States continued at a record pace in the second quarter of 2020, with estimated net flows of $10.4 billion. That nearly matched first-quarter flows and brought the total for the first half of the year to $20.9 billion, just shy of the annual record of $21.4 billion in sustainable fund net flows set in 2019. Last year’s flows were 4 times the previous record for a calendar year. I view it as just more craziness from the Trump administration. (Sustainable Funds Continue to Rake in Assets During the Second Quarter)
ESG Rulemaking by DOL: Making America Grate Again
Why did Trump’s DOL propose a rule to make it more difficult for Americans to invest in ESG funds when that is where they are moving their money. Is the coal lobby is stronger than the solar lobby?
Trump was recently asked by a reporter about the QAnon movement:
Q: Mr. President, at the crux of the theory, is this belief that you are secretly saving the world from this satanic cult of pedophiles and cannibals. Does that sound like something you are behind or a believer in?
THE PRESIDENT: Well, I haven’t — I haven’t heard that. But is that supposed to be a bad thing or a good thing? I mean, you know, if I can help save the world from problems, I’m willing to do it. I’m willing to put myself out there. (Remarks by President Trump in Press Briefing | August 19, 2020)
More top of mind issues are COVID-19, climate change, systemic racism, wealth inequality. Sure, save us from the supposed worldwide cabal of Satan-worshiping cannibal pedophiles running Hollywood and the deep state. But most Americans are focused on more widespread issues. That is why they are pouring money into ESG funds. See especially The Rise of ESG Funds in Passive Investments.
James McRitchie Favors Competition
DOL should make ESG funds more easily accessible, instead of putting out roadblocks, as their rules propose. However, we do suffer from an abundance of greenwashers trying to appeal to millions of greenwishers. See Morningstar Direct Uncovers ESG Hypocrites.
The real problem is too little information. The DOL’s attempt at blockage is not alone. The SEC proposes to decrease the funds required to disclose investment holdings by almost 90%. (Proposed Form 13F Changes Would Reduce Visibility into Stockholder Base and Activist Activities) Under the proposed rules it would be harder to know what firms ESG funds invest in.
Real progress could be made if the SEC would foster competition. Keep the requirement that funds report their investments. Also, require real-time disclosure of proxy votes in a user-friendly sortable format. That would make it easier to see what funds are living up to their ESG names. (see Mutual Fund Wars Over Fees AND Proxy Votes) Fund competition around votes could finally let the half of Americans with fund investments have some say in fund governance. We could choose funds that vote as we would.
Given a choice, some might use that voice to dial the clock back to short-term shareholder primacy. I’m betting most will agree corporations have a broader purpose. Investors will insist funds vote for ESG measures to improve long-term prospects. Our companies, society, and environment need to be measured against our values. Giving investors the information we need to monitor the proxy votes of our funds would lead those funds to monitor how our corporations are governed. We need at least that basic accountability mechanism to begin to complete a more virtuous feedback loop.
ESG Rulemaking by DOL: Public Comments
Of the 8,636 total comments in the analysis after removing the 101 extension requests and duplicates, more than 95 percent of comments opposed the DOL’s proposed rulemaking. Only 4 percent of comments expressed support, and 1 percent expressed neutral views or recommended changes without clearly expressing support or opposition. Public comments were overwhelmingly opposed across individuals, investment-related groups, and non-investment-related groups. The 30-day public comment period ended on July 30.
Participating organizations in the categorization and analysis of public comments include US SIF: The Forum for Sustainable and Responsible Investment, Ceres, Intentional Endowments Network (IEN), the AFL-CIO, the Interfaith Center on Corporate Responsibility (ICCR), Impax Asset Management and Morningstar, Inc. The group summarized the comments and the constituencies that made them. This analysis provides transparency and should help the public, affected parties and regulators draw appropriate conclusions from the thousands of comments submitted.
Key Findings
- The vast majority of commenters were individuals, reflecting significant grass-roots investor support for sustainable investing. Ninety-six percent of the 8,337 comments or petition signatures from individuals expressed opposition.
- The opposition was especially high among investment-related groups, with asset managers, financial advisors, financial service providers, asset owners, pension plans, and investment organizations either unanimous or all but unanimous opposing the proposal. Among 229 comments from investment-related groups, 94 percent were opposed, 2 percent were in favor, and 4 percent were mixed or neutral.
- A majority of non-investment-related firms and organizations opposed the rule, yet comments from this smaller group exhibited the highest levels of support. Among the 120 comments from non-investment-related firms and organizations, 37 percent of comments were in favor, a 57 percent clear majority of comments were opposed, and 6 percent were mixed or neutral.
Key Themes
- DOL’s proposal does not make a case for a problem that requires this rulemaking and, in particular, includes no evidence that fiduciaries choose investments that are likely to have lower returns in exchange for ESG criteria being considered.
- The proposed rule largely dismisses the financial materiality of ESG issues and ignores research regarding the materiality of ESG in financial decision-making.
- The proposed rule is based on a flawed and unsupported assumption that ESG funds give up financial returns in favor of “non-pecuniary” rewards.
- Rather than subjecting fiduciaries who wish to utilize ESG criteria to additional burdens and restrictions, incorporating ESG factors into investment decisions should be considered a part of fiduciary duty.
- Excluding ESG investments from Qualified Default Investment Alternatives (QDIAs) in Defined Contribution plans are inappropriate and could harm plan participants/beneficiaries
- Singling out ESG for a heightened level of scrutiny and restriction is inappropriate.
ESG Rulemaking by DOL: Quotables
US SIF Chief Executive Officer Lisa Woll said:
The overwhelming response reflects the growing interest in and asset flows to sustainable investing. Professionally managed assets utilizing one or more sustainable investment strategies grew 38% from 2016-2018 to more than $12 trillion. 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. Limiting plan participant options and diversification opportunities should not be the role of the Department of Labor.
Ceres CEO and President Mindy Lubber said:
As the comment letters confirm, ESG risks are often systemic risks that pose short, medium and long term financial risks to investment portfolios. The COVID-19 pandemic has been a devastating reminder of just how quickly lives and livelihoods can suffer and economies can falter when systemic risks are ignored. Investors understand climate change is a systemic risk that poses similar deadly and drastic consequences — including price volatility and asset value losses — across all sectors critical to our economy.
AFL-CIO Deputy Director of Corporations and Capital Markets Brandon Rees said:
This proposed rule will create unnecessary and burdensome regulations that will discourage fiduciaries from making prudent investments that generate collateral benefits for communities and economic growth for working people. We request that the Department of Labor withdraw this proposed rule in its entirety, or at least schedule a public hearing to be conducted virtually in accordance with COVID-19 public health guidelines.
Impax Asset Management LLC President Joe Keefe said:
Essentially, DOL is proposing to substitute its judgment, a judgment which may be more subject to political influences, for the judgment of investment practitioners on the ground who possess the responsibility and the expertise to design and administer retirement plans. The proposed rule effectively substitutes activist, big government fiat in place of the market.
Morningstar Head of Policy Research Aron Szapiro said:
As we said in our comment letter, the Department of Labor’s approach is out of step with the increasingly mainstream practice of incorporating ESG considerations into investment research, and this analysis reinforces that reality. The rule as proposed would take away important options from retirement investors and deny them access to analysis on mitigating ESG risks.
Intentional Endowments Network Co-founder and Executive Director Georges Dyer said:
Endowments have increasingly seen the benefits of ESG investing to reduce portfolio-level and system-level risk, enhance returns, and preserve capital — and as a result, there is growing interest in exploring the integration of ESG options into their retirement plans. IEN’s Sustainable Retirements Initiative supports fiduciaries in their consideration of all financially material factors, including ESG factors, into their investment processes. The DOL’s proposal is likely to have the perverse effect of dissuading fiduciaries, even against their better judgment, from offering ESG options for their plans. As a result, it will unfairly, and harmfully, limit plan diversification and perhaps compel plan participants to choose options that are either more risky or less profitable.
ICCR Chief Executive Officer Josh Zinner said:
The proposed DOL rule is a thinly disguised political attack on ESG investing, with no legitimate factual basis. As the overwhelming negative response demonstrates, investors across the spectrum see environmental, social, and governance factors as a critical part of the analysis of the long-term value of investments.
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