Pushback on the Labor Department’s ESG proposal continues—this time in a letter from about 40 Democrats in the House of Representatives.
The July 20 letter to Secretary of Labor Eugene Scalia, signed by Reps. Brendan Boyle (D-PA-02), Andy Levin (D-MI-09) and Susan DelBene (D-WA-01) and cosigned by three dozen of their counterparts in the House, states that the proposed rule “drastically shifts the landscape of responsible, social investing and cuts at the freedom of private entities to invest based on their individualized priorities.”
Moreover, the authors state that “by preventing entities governed by the Employee Retirement Income Security Act (ERISA) from investing with ESG principles, the DOL has not only engaged in an overreach into the actions of private businesses, but it has also significantly burdened those engaging in a practice that has proven beneficial.”
In late June, noting its concern “that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan,” the Labor Department proposed a new rule to clarify the standards. A proposal that, certainly in the rule’s preamble, seemed designed to dampen enthusiasm for these investments.
Acknowledging that ESG investments presently account for only 0.1% of the total assets in defined contribution plans, the letter states that “there is increasing interest in them,” citing a Morningstar report that says “mutual funds focused on sustainable investing attracted more than $20 billion in assets in 2019, more than 4 times the flows in 2018.” The letter continues: “The DOL neglects current conventional wisdom in investing and seeks to impose their political principles on private entities,” and “professional trends in financial investing point towards an increased emphasis on ESG investing to account for future returns, growth, and sustainability.”
The letter takes issue with the Labor Department’s assertion that an increasing use of the term “ESG” as evidence of ill-advised decision-making on the basis of ESG factors, pointing instead to a Morningstar report that they said found that “funds based on environmental, social and governance goals outperformed conventional offerings during 2019 and the first quarter of this year.”
The letter says there is “little to suggest that workers sacrifice returns by investing in ESG funds,” citing another report where “Morningstar researchers found that investors that focus on companies with positive ESG attributes generally do not sacrifice returns, although there may be a small ESG premium in the U.S.” The authors also draw a contrast with the Trump administration’s recent investment instructions to the Thrift Savings Plan that, in directing a halt to investment in Chinese companies that “overwhelmingly emphasized ‘nonpecuniary’ concerns” among the considerations underlying the direction, with concern expressed with “nonpecuniary” interests in ESG investing in the Labor Department’s proposed rule.
The letter closes, “We reiterate our opposition to this rule and encourage the Administration to withdraw it. If you choose to continue with the proposed rule, we strongly urge you to extend the comment period from 30 days to 90 days to allow stakeholders reasonable time to analyze the proposal and provide sufficient and helpful feedback. We look forward to working with the DOL to develop rules that strengthen ERISA plans rather than hinder them.”
The letter comes less than a week after a group of Senate Democrats expressed similar concerns, and called on the Labor Department to withdraw its proposal clarifying the investment duties of ERISA plan fiduciaries in relation to ESG criteria, saying the proposal would discourage financial advisors from supporting racial justice. Shortly after the release of the proposal, Sen. Patty Murray (D-WA), ranking member of the Senate Health, Education, Labor and Pensions (HELP) Committee, argued that the proposed rule would discourage financial advisors from considering ESG criteria and ignored findings that show ESG investments outperform traditional investments.
