Two proposed rulemakings from the Labor Department in the past eight weeks would largely gut sustainable investing options and strategies in retirement plans. These proposals would reverse the Labor Department’s 2015 and 2016 guidance while ignoring the growing consensus among academics, retirement plan fiduciaries and professional money managers that responsible companies are likely to outperform over the long haul.
The first measure, “Financial Factors in Selecting Plan Investments,” now in the late stages of the clearance process, would discourage 401(k) and other qualified retirement plans from offering funds from managers that consider environmental, social and governance (ESG) factors in their due diligence.
The proposal establishes exacting requirements for wringer and documentation virtually inclusion of ESG options. The Labor Department currently has no such requirements for any other kinds of funds.
Support for the measure has been surprisingly underwhelming. A group of investor organizations and financial firms analyzed the increasingly than 8,700 public comments on the proposed rule and found that only 4% of comments expressed support. Some 95% of the comments — wideness individuals, investment-related groups and non-investment-related groups — were strongly opposed, and 1% expressed neutral views or didn’t unmistakably express support or opposition.
The 30-day public scuttlebutt period ended on July 30 and the Labor Department is likely to implement the proposal surpassing the end of the year.
The second proposal, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which was spoken at the end of August, would restrict the worthiness of retirement plans to hold visitor leadership subject through proxy voting. It alleges that proxy measures are onerous for public companies.
A fundamental misunderstanding
The reasoning betrays a fundamental misunderstanding of how financial professionals consider ESG criteria in their investments and how proxy voting practices enhance long-term value of investments. Considering of inconsistent corporate disclosure rules, investors often file proxy proposals to receive relevant ESG information.
Both proposals represent a solution in search of a problem. They imply that investment managers and plan fiduciaries promote social goals over sound investment analysis, but proponents goof to cite a single instance that this has happened or any related enforcement deportment they have taken.
Moreover, the organ doesn’t unclose any of the dozens of studies that demonstrate that consideration of ESG issues may lead to largest investment outcomes. Morningstar found that during the stock swoon in the first quarter of 2020, all but two of 26 ESG indexes suffered fewer losses than their conventional counterparts. Studies of longer periods from Morgan Stanley and MSCI have found no financial trade-off in the returns delivered by ESG funds relative to traditional funds. Additionally, a 2018 report from the Government Accountability Office (GAO) reported that 88% of the wonk studies it reviewed found a neutral or positive relationship between the use of ESG information and financial performance.
Setting whispered the wonk debates over ESG, the market has once spoken. As of 2018, increasingly than one of every four dollars under professional management was invested using ESG criteria, equal to the US SIF Foundation’s 2018 Report on U.S. Sustainable, Responsible and Impact Investing Trends. Morningstar has reported that in 2020, flows into sustainable funds outpaced traditional funds.
Far from making a concession to ESG, professional money managers increasingly unriddle ESG factors precisely considering of risk, return and fiduciary considerations. They know that bad policies and practices can harm companies’ reputations, stupefy consumers and lead to stock-price declines. Climate transpiration is widely recognized as an environmental and financial risk for companies. Similarly, companies that goof to promote racial probity squatter real and meaningful challenges.
Investors are coming to recognize that companies with largest policies and practices and increasingly robust corporate governance will outperform over the long term. A 2018 US SIF Foundation survey of U.S. sustainable investment money managers with aggregated resources of increasingly than $4 trillion found that three-quarters of the respondents employ ESG criteria to modernize returns and minimize risk over time, and 58% cited their fiduciary duty as a motivation.
“In 2020, flows into sustainable funds outpaced those into traditional funds.”
The Labor Department’s proposals would largely supplant an existing regulatory regime that was once working. In 2015 and 2016, President Obama’s Labor Department thoughtfully considered these issues and issued Interpretive Bulletins clarifying that fiduciaries of ERISA-governed retirement plans “do not need to treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely considering they take into consideration environmental, social, or other such factors.” The second Interpretive Bulletin recognized that shareholder rights, including voting proxies, are important to long-term shareholder value and resulting with fiduciary duty.
These new proposals are not taking place in a vacuum. They are part of the Trump administration’s broader effort to generate barriers to investment practices that have a focus on environmental, social or governance issues. The Securities and Exchange Commission is currently seeking to create its own barriers on this topic, including the role of proxy voting firms, fund names and shareholder rights.
By tipping the scales versus consideration of ESG criteria when selecting investments and versus the use of proxies to encourage largest governance and largest disclosure, the Labor Department proposals prevent plan sponsors from fulfilling their fiduciary obligation. It should retain current practices related to the utilization of ESG criteria and proxy voting.
Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment. Follow her @LisaWoll_USSIF. Judy Mares is former deputy teammate secretary in the Labor Department.