Does the Labor rule establish a duty to consider ESG factors? (2021)
| Environmental, social, and corporate governance |
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| • What is ESG? • Enacted ESG legislation • Arguments for and against ESG • Opposition to ESG • Federal ESG rules • ESG legislation tracker • Economy and Society: Ballotpedia's weekly ESG newsletter |
Tara Siegel Bernard, writing in The New York Times’ “Business Briefing,” noted an additional detail that was largely absent from most of the rest of the reporting on the story:
| “ | “The Labor Department proposed rule changes on Wednesday that would make it easier for retirement plans to add investment options based on environmental and social considerations — and make it possible for such options to be the default setting upon enrollment.
In a reversal of a Trump-era policy, the Biden administration’s proposal makes clear that not only are retirement plan administrators permitted to consider such factors, it may be their duty to do so — particularly as the economic consequences of climate change continue to emerge…. The new regulations would also make it possible for funds with environmental and other focuses to become the default investment option in retirement plans like 401(k)s, which the previous administration’s rules had prohibited.”[1] |
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Response to the Labor rule
In the June 10 issue of National Review, Patrick Pizzella, the Deputy Secretary of Labor (and briefly, the Acting Secretary) penned an article explaining why the Trump administration promulgated its rule and why he believes that reversing the rule is a significant mistake. He wrote:
| “ | “Asset managers often apply supposedly “socially conscious” ESG — environment, social, and (corporate) governance — criteria to screen potential investments. Pension funds are the deep pockets for woke capitalism. But ESG or “sustainable” investing is anything but a slam dunk for pension beneficiaries. There are real risks, and many financial professionals have begun to raise serious questions about them….
Since 1994, four different secretaries of labor — two from each party — have issued what’s known as an “interpretive bulletin” (IB), providing guidance for investing in ERISA-managed funds in compliance with the statute. I refer to this as “IB ping-pong” because it is relatively easy for one administration to respond to another administration’s IBs without soliciting formal stakeholder input. In 2020, however, Secretary Eugene Scalia decided that the Department of Labor (DOL) should undertake formal rulemaking under the Administrative Procedures Act — which requires the solicitation of comments from the public — and provide more-enduring certainty to the regulated community and America’s retirees. The department received over 1,500 comments and revised and tailored a final rule, published last November, that was in part based on them. The rule reminds plan providers that it is unlawful to sacrifice returns or to accept additional risk through investments intended to promote a social or political end. It allows for the inclusion of an ESG fund among other investment options, provided that it is selected based on pecuniary considerations. But ESG factors are often touted for nonpecuniary reasons, as addressing social welfare more broadly. That may appeal to some investment advisers, but it is inappropriate for an ERISA fiduciary managing other people’s retirement funds…. Ironically, the department — without an assistant secretary for the Employment Benefits Security Administration, a solicitor, or a deputy secretary — maintains that it had heard from a wide variety of stakeholders, including asset managers, labor organizations, plan sponsors, and investment advisers. But the rule that the DOL published last November, titled “Financial Factors in Selecting Plan Investments,” wasn’t written just for those stakeholders. It was primarily written for the plan participants and beneficiaries — the people depending on the income once they retire…. We should all keep in mind that annual expenses for so-called sustainable exchange-traded funds (ETFs) are more than ten times higher than those for the cheapest index funds, according to the financial-services firm Morningstar. As Jason Zweig, a well-respected financial analyst, recently wrote in the Wall Street Journal: “ESG is the last best hope for investment firms seeking to hang onto fat fees.” The skeptics of ESG investing include a growing list of distinguished financial experts, such as Alicia Munnell, executive director of the Center for Retirement Research at Boston College (“I really have no respect for ESG investing”); Tariq Fancy, former chief investment officer for sustainable investing at BlackRock, the largest asset manager in the world (“The financial services industry is duping the American public with its pro-environment, sustainable investing practices. This multitrillion dollar arena of socially conscious investing is being presented as something it’s not. . . . In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community”); and Securities and Exchange commissioner Hester Peirce (“The first issue is we don’t even know what ESG means”; “Not only is it difficult to define what should be included in ESG, but, once you do, it is difficult to figure out how to measure success or failure”)…. As for plan fiduciaries considering ESG factors when selecting investment options, they should curb their enthusiasm. The Biden administration’s ability to shield fiduciaries from legal exposure may be very limited without congressional action or a sudden change of heart by the Supreme Court, whose long-established ruling on the matter is that ERISA’s duty of loyalty requires fiduciaries to act for the exclusive purpose of providing financial benefits to participants. Fiduciaries would be wise to act very prudently and document their decision-making processes.”[1] |
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See also
- Environmental, social, and corporate governance (ESG)
- Economy and Society: Ballotpedia's ESG newsletter
External links
Footnotes
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