Battle Rages Over The US DOL Proposed Rule To Limit The Use Of ESG Criteria In Pension Plans

Battle Rages Over The US DOL Proposed Rule To Limit The Use Of ESG Criteria In Pension Plans

In June the US Department of Labor’s Employee Benefits Security Administration (EBSA) published a proposed rule relating to Financial Factors in Selecting Plan Investments. EBSA sets the rules that govern retirement benefits plans for 154 million Americans representing $10 trillion in assets. Asset managers and the ESG community in the US have reacted with horror. In August, State Street Global Advisors, the world’s third largest asset manager publicly criticized the rule and in a letter stated that: “the department’s proposal unfortunately discourages […] integration [of ESG factors] by US private sector plan fiduciaries, potentially disadvantaging plans, participants and beneficiaries by restricting access to an entire type of long-term, value-driven investment that could help ensure future retirement security.”

What’s the issue? If the proposal is set in law, it would be much harder for asset managers to offer pension plans aligned with ESG investment criteria as a default option. This would constrict the flow of funds into these plans and consequently but a brake on the integration of ESG considerations into investment decisions by corporations. The proposed rule is predicated on the fact that some ESG factors are not aligned with economic consequences or risk/return considerations on which asset managers have a fiduciary duty to base their investment decisions for fund beneficiaries. Critics of the DOL proposed rule on ESG investments point to the superior performance of firms and funds which have incorporated ESG criteria into their risk management strategies and investment decisions. This actual performance directly contradicts the argumentation of the DOL proposal. Regulations in Europe are moving in the opposite direction. In March 2021 the EU’s regulation on sustainability disclosures by financial market participants will come into effect.

Whether or not the DOL’s proposed rule on ESG investments gets enshrined in law, it has certainly had a galvanizing effect on the ESG community in the US. The potential threat to ESG investing will accelerate efforts by financial market participants – as set out by BlackRock in their letter to the DOL – to standardize ESG terminology, metrics and data. For CFOs who see benefits in ESG transparency this will add further impetus to invest in ESG IT systems and assurance services which align with more stringent disclosure requirements. Firms which lobbied the DOL to propose the rule are those whose share price would be negatively impacted by more ESG disclosures – a recognition of the ESG risks they face. These firms – for instance those facing the prospect of stranded fossil fuel assets – should include ESG factors in their enterprise risk management work even if they don’t want to disclose the information for fear of spooking investors.