The Department of Labor made final on Friday a rule making it harder for socially-minded investments to be included in select retirement plans, a move that some commenters welcomed, preferring return-driven decisions. Others objected, calling the Trump-led shift a misread of investing trends and preferences.
“Financial Factors in Selecting Plan Investments” will 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, those opposed to the change have stressed. The proposal establishes burdensome requirements for analysis and documentation around inclusion of ESG options, those critics say. The Labor Department currently had no such requirements for any other kinds of funds.
The rule finalized Friday stipulates that fiduciaries for private pension plans covered by the Employee Retirement Income Security Act of 1974 (ERISA) cannot invest in ESG vehicles that sacrifice investment returns or take on additional risk. It specifically requires that ERISA plan fiduciaries “select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.”
The rule was proposed in June and drew criticism from some in the retirement-planning community, including claims that the Labor Department did not sufficiently justify its reasoning behind the proposal and concerns that the proposal would add to fiduciary confusion regarding if and when ESG factors may be considered material.
The DOL received more than 8,730 comments. Most of the comments came from individuals —of which 96% opposed the rule change —and one petition from Green America drew more than 7,000 signatures, representing the mobilization of investor-led grassroots opposition, an analysis of the review period by Morningstar and US SIF showed. Opposing comments came not only from asset managers focused on ESG investing but also from many large conventional asset managers, including BlackRock, Fidelity, State Street Global Advisors, T. Rowe Price and Vanguard.
“This is another harmful action by the Trump administration, at a time when the global climate crisis looms large as another systemic risk upending lives, livelihoods and causing deadly devastation and damage,” said Mindy Lubber, president of sustainable investing advocate Ceres.
“This decision will impair the ability of pension funds to consider the short- and long-term financial risks posed by extreme weather, water shortages and human rights abuses in performing their investment analysis and allocations,” she said.
The rule-making comes as this investment focus gains interest from investors. Sustainable investing assets in the U.S. reached $12 trillion in 2018, up 38% from 2016, according to a recent US SIF Foundation’s Trends report.
ESG investments SUSA, +0.58% have been outperforming broader index funds so far in 2020, according to data from Standard & Poor’s and Morningstar. Those gains can be linked in part to a heavy concentration in high-flying tech stocks and away from oil during the COVID-19 shutdown.
Alicia Munnell, a columnist for MarketWatch and director of the Center for Retirement Research at Boston College, welcomes the agency’s stance, she wrote at the time of the proposal.
“Pension fund investing is not the place to solve the ills of the world. ESG investing is a diversion that enriches financial managers, reduces participants’ retirement investment returns and makes people think they are addressing a problem without doing anything substantial,” Munnell said. “No one can seriously think that stock selection is going to fix climate change.”
Aron Szaprio, Morningstar’s director of policy research, said ESG risk analysis should be part of any prudent investment decision-making process as it is difficult to holistically assess a company’s long-term prospects without a clear view into the sustainability of its business.
Szaprio said in a recent commentary that regardless of the outcome of the election, Morningstar does not foresee a decline in investor interest toward sustainable funds.