Last year, pension fund administrators and investors received disappointing news when the U.S. Department of Labor (DOL), under the prior administration, passed rules severely reducing ERISA-governed retirement plans’ access to environmental, social, and governance (ESG) investments and proxy voting.
But in a recent statement, the DOL’s Benefits Security Administration announced that it will not enforce the final rules on “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.”
This is a welcome change in policy for plan administrators and investors alike. The rules created a complicated framework and limitations for managers as to the selection of ESG investments for private employer-sponsored retirement plans. The rules also implied that managers would be sacrificing investment returns if picking investments based on “non-financial considerations.”
“These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights,” said Principal Deputy Assistant Secretary for the Employee Benefits Security Administration Ali Khawar. “We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social, and governance integration can play in the evaluation and management of plan investments while continuing to uphold fundamental fiduciary obligations.”
Lisa Woll, CEO of the U.S. Forum for Sustainable and Responsible Investment, said in a tweet that the recent reversal of DOL’s position is a “Great first step!”
The DOL had received input and complaints from various sustainability stakeholder groups, including asset managers BlackRock, Vanguard, State Street Global Advisors, Fidelity, and Lazard Asset Management (LAM). In addition, labor organizations, consumer groups, pension plan sponsors, and financial advisors also voiced their opposition to the rules. They noted that the rules failed to consider industry-wide evidence of ESG investments’ positive contribution to portfolio returns and risk reduction for retirement investors. In addition, the rules confused many investors as to their correct application when managing retirement plans.
In a letter addressed to the DOL last July, LAM wrote: “The Proposed Release would remove some of the discretion that plan fiduciaries currently have to select investments incorporating ESG considerations and would discourage those fiduciaries from using their remaining discretion to add ESG investments.”
The letter also cited research that clearly shows that “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 percent to the top 20 ESG funds’ returns over the last ten years, with more than 80 percent of that return occurring in the last four years of the study period.”
Just a month ago, Woll discussed on PLANSPONSOR how contribution plans defined by the U.S. fell behind on ESG investing because of inconsistent and confusing rules. With the U.S. being the largest retirement plan market in the world covering 136 million participants and more than $11 trillion in assets at the end of 2019, she noted that “fewer than one-fifth of private-sector retirement plans offer funds that consider ESG criteria as part of their investment analysis,” according to the Report on US Sustainable and Impact Investing Trends 2020.
Woll also referred to several studies that showed strong interest among individual investors to have access to ESG investments in their retirement plans. The interest among millennials was even higher, with 95 percent interested in sustainable investing.
She also underscored the fact that institutional asset managers recognize the value of sustainable investing.
“Numerous studies confirm that companies with good ESG policies and records tend to deliver better financial performance,” Woll wrote. “Not surprisingly, seven of the 15 investment management firms that constitute the top 10 defined benefit (DB) and the top 10 DC plan managers in the United States are signatories to the Principles for Responsible Investment and thus pledge to ‘incorporate ESG issues into investment analysis and decision-making processes.’”