In an April 2018 bulletin, the US Department of Labor (DOL) advised plan sponsors to exercise caution when it comes to environmental, social, and governance (ESG) investing and retirement. Speaking in particular to Employee Retirement Income Security Act of 1974 (ERISA) plan fiduciaries, the DOL’s Field Assistance Bulletin No. 2018-01 asserts that these “[f]iduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision.”
In the wake of the bulletin’s publication, many from both sides of the ESG aisle spoke up to unpack the DOL’s guidance and weigh in with their own take. Here’s a look at the conversation from five different perspectives.
Legal Opinion
What happened: The Harvard Law School Forum on Corporate Governance and Financial Regulation published a breakdown of the bulletin and its implications by lawyers at Davis Polk & Wardwell. First, the authors note that the DOL guidance means that some fiduciaries should consider ESG factors only if they believe the latter will impact investment risks or returns; they must not focus on ESG factors “solely to benefit the greater societal good.” Second, relevant fiduciaries should only participate in proxy voting or shareholder engagement activities if the related costs of doing so can be justified relative to the likely economic benefit. Finally, the authors say that the biggest overall impact of the guidance could be to restrict the use of ESG funds as an investment option in retirement plans.
Why it matters: The Davis Polk & Wardwell counsel’s review helpfully translates some of the bulletin’s dense language, while taking care to remain objective and avoid overstating the DOL’s position. The authors emphasize that only those investments covered by ERISA rules are bound by the DOL guidance, for example, and note that the bulletin does leave room for fiduciaries to consider ESG tools and analyses under certain circumstances.
Read more: The Impact of DOL Guidance on ESG-Focused Plans, Harvard Law School Forum on Corporate Governance and Financial Regulation, May 8, 2018
Staying Positive on ESG
What happened: Financial advisers and investment professionals debated whether the DOL bulletin was politically motivated, and as such a rowing back on previous guidance issued during the Obama administration. Overall, financial advisers didn’t believe the latest DOL guidance would put a damper on the growing popularity of ESG investing. However, there was also the feeling that advisers and fiduciaries may need to keep more detailed records about ESG investment decisions to cover their backs.
Why it matters: Financial advisers appear undeterred from choosing ESG funds.
Read more: DOL guidance on ESG funds shouldn’t have chilling effect on social impact investments, InvestmentNews, May 3, 2018
Clarification Needed
What happened: The US Government Accountability Office (GAO) published a study in which it assessed the use of ESG factors by retirement plans and the guidance being offered by the DOL. The GAO said that inconsistent data and regulatory uncertainty posed challenges for US defined-contribution retirement plans on the use of ESG factors. It wants the DOL to clarify whether the liability protection offered to qualifying default investment options allows the use of ESG factors.
Why it matters: Uncertainty about the rules surrounding ESG investing may needlessly put off some retirement plans from making ESG investments.
Read more: Clearer Information on Consideration of Environmental Social and Governance Factors Would Be Helpful, US Government Accountability Office, May 22, 2018
Performance Comes First
What happened: A paper by professor Joseph Kalt and Dr. Adel Turki accords with the DOL’s general view that investment return and risk objectives should come before wider ESG considerations when it comes to ESG investing and retirement plans.
Why it matters: The paper from the two economists, one of whom is a Harvard professor, puts some academic weight behind some of DOL’s arguments.
Read more: Is ESG Investing Bunk? Yes, New Paper Finds, 401(k) Specialist, June 8, 2018
ESG Continues to Grow
What happened: Bloomberg reported that BlackRock and Wells Fargo were planning to launch their first ESG funds for US retirement savings plans. The investment firms are thought to be positioning themselves to cater to the growing appetite for ESG investing among millennials. Insiders claimed that BlackRock was planning to launch the first of these new products later this year.
Why it matters: Actions may speak louder than words. Both huge names in the US, BlackRock is also the world’s largest asset manager. The firms clearly see growth potential in the ESG market and don’t appear to be put off by the DOL’s recent guidance, either. With such major players starting to offer ESG funds to retirement plans for the first time, more may be likely to follow.
Read more: BlackRock, Wells Fargo Are Betting on Ethical Investing Funds for 401(k)s, Bloomberg, June 13, 2018
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