Last week we got the final regulation on ESG investments in defined contribution (DC) plans (and some clarity on proxy voting)—so what, at this early date, do readers have to say?
Yes, just ahead of the Thanksgiving holiday, the Labor Department issued its final regulation on environmental, social and governance (ESG) issues with regard to investments in DC plans. The bottom line is that the new position allows “plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting.” The operative word for plan fiduciaries is MAY, not must consider ESG factors—a concern that had arisen in the wake of the proposed regulation previously issued.
The rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” specifically and pointedly sets aside the “pecuniary-only” standard at the center of the regulation set out in the waning days of the Trump Administration—a standard that Assistant Secretary of Labor Lisa Gomez said had had a “chilling effect” on plan investment decisions, even when those considerations were deemed to be in the best interests of participants and beneficiaries—causing them to miss out on opportunities, and failing to guard against risks.
Now—that’s likely not the end of the matter. Concerns remain around the definition of ESG, and its specific application for these purposes, benchmarks remain—well, fluid—and after a period where the returns on these type investments looked pretty favorable, they—like pretty much everything else in the markets—have fallen on hard(er) times. So, what do NAPA-Net readers make of it?
Well, as for their current “take” on the matter:
42% - I think it makes sense as a consideration, but not a controlling consideration.
41% - I've got my doubts.
10% - I'm open to the idea, but not really committed.
7% - I'm completely on board!
As for the new regulation itself:
30% - I didn't have a problem with a pecuniary standard.
29% - Well, it's better than their proposed rule.
25% - Haven't read it yet.
16% - They nailed it!
Beyond that, readers had some additional comments:
The rule is consistent with the history of ERISA investment regulation—it doesn't play favorites of investment types and lets fiduciaries make the call.
"ESG is a fraud" was not an option to check so I'll leave this blank. SBF and FTX were ESG darlings. SBF will be in jail longer than Madoff. Electric vehicles harm the environment more than gas-powered cars. Oil and Gas will outperform over the next cycle. Advisors that go all-in on this risk their reputation and their businesses over the long-run.
To be honest...this all seems like a complete waste of people's time as we're essentially right back where we've always been. There's nothing wrong...even as Fiduciaries...of allowing "ESG" funds to be available in a plan, even if their performance doesn't always stack up...as typically is the case. Most ESG investors are well aware these funds won't keep up with the "Joneses."
I disagree with the entire premise that default investments could be ESG funds. It’s the definition of conflict of interests.
I feel the ESG movement is extremely overblown and too much time, money and resources are being dedicated to it. Investment firms were doing a lot of this work/analysis for decades. There are much more important areas of legislation and general oversight that would benefit plan participants far more if this much attention was given to them.
May be the dumbest retirement plan legislation ever!
Don't you think that instead of having such a slanted survey that doesn't allow you to take a fully negative take on ESG., you could have made it more measured? I realize whoever wrote this survey is all in on ESG, but most of us are not.
Much ado about not a lot....
I read the first 150 pages, still have 86 to go, but I keep falling asleep…
Why are there no negative responses available? It's a bad idea.
Didn't think they needed 200+ pages to say that ESG can be considered as a factor in selection and monitoring of investments
Regulation Results?
And then, though it's early yet—generally speaking—we asked readers what effect (if any) they thought the DOL's new ESG regulation would have on DC plan adoption of ESG options:
31% - It may encourage those already inclined to add those options.
28% - It may encourage those already inclined, but I don't see much movement.
19% - I don't see it having any impact at all.
17% - It may actually discourage some from adopting those options.
5% - It will encourage those who have already adopted those options.
The biggest barrier to ESG investing is performance, not the notion of ESG. The rule makes it permissible—better investments will make it more widely adopted.
More red meat for lawsuits
Many plans interested in ESG (e.g., University 403(b) plans) already have ESG options.
The question assumes the rule will go into effect. I believe it will be subject to a court challenge because it significantly departs from the "exclusive benefit" requirement set forth in the statute.
We then asked if it (ESG and the new regulation) would be a planned topic of discussion in quarterly plan sponsor meetings:
27% - No.
24% - Yes.
22% - With some clients, not with all.
14% - Not sure yet.
8% - With most clients.
5% - With a few clients.
We need to review the IPS for all our plans.
@ annual mtgs.
I've always asked if a sponsor wants to add ESG funds...but not related to these regulations.
As a good consultant and investment fiduciary we have to brief plan sponsors on any new regulations. Even if they are poor or unnecessary regulations.
And tell them how bad that ESG is, that it cost investors and participants money.
I will be talking about it, and recommending against it.
Yeah, we discuss all new regulations in our client meetings.
Plan sponsor requested adding ESG fund a year ago. I encouraged waiting for the DOL's ESG rule to be finalized first, to ensure all would be well. Finally I can return to the plan sponsor with an affirmative response! Should be easy-peasy to add the requested fund now, with less worries from a regulatory standpoint.
I am cautious and rankly, leery. I see it as another trend like we saw in the 90's with socially conscious funds. Just another left winger push from the greenies!!!
Participant Preferences?
And finally, we noted that in that new ESG regulation there's a provision that “clarifies” that fiduciaries “do not violate their duty of loyalty solely because they take participants’ preferences into account when constructing a menu of prudent investment options for participant-directed individual account plans. If accommodating participants’ preferences will lead to greater participation and higher deferral rates, as suggested by commenters, then it could lead to greater retirement security”—and asked readers if they thought it would matter in terms of adoption?
39% - It may encourage those already inclined to add those options.
25% - It may encourage those already inclined, but I don't see much movement.
22% - I don't see it having any impact at all.
10% - It may actually discourage some from adopting those options.
4% - It will encourage those who have already adopted those options.
It is confusing—the duty of loyalty isn't the problem, it's the duty of prudence.
The effect on thematic investing will be most interesting. It also opens a range of personalization options for managed accounts as QDIAs.
The vast majority of participants don't understand the basic operations of a mutual fund now. Putting some type of ESG label or score on a fund may cause a lower amount of diversification of investments if the majority of funds are 100% equity based. How many TDF options will get an ESG "thumbs up or down"? ESG doesn't protect against market volatility at all. Diversification and asset allocation are still way more important for prudent investing in my opinion.
Who decides ESG scores? Who decides if it is an accurate reflection of the company? Can the participant sue if they are put in a ESG fund and a company in the portfolio turns out to be a bad actor on the ESG front? Asking for political involvement in retirement plans will be a bad thing in the end. Ridiculous.
The new regulation will be overturned in a lawsuit.
Most participant engagement is laser-focused nowadays on saving (specifically, saving early), I doubt any investment change would matter much. Never mind the fact that many participants are in tdfs anyway...
Language is broad enough to allow plenty of loopholes. Typical govt jive.
Other Comments
Not having ESG will be a problem going forward for 2 reasons. 1. There is demand, particularly in the not-for-profit sector 2. Ignoring a class of investments like ESG could be a fiduciary problem.
The Trump rule went too far and threw the baby out with the bathwater. This rule is surprisingly neutral.
One of the questions I have surrounding ESG is how do you quantify that, who is benchmarking ESG investments and companies within pooled funds, and how is that regulated/monitored. Until there is clear and concise reporting on this, I don't know how law or best-practices can be pushed onto the industry.
Five or six years ago, there was a fair amount of academic research documenting the edge of ESG investing. I don't know if the edge still exists today with so many Securities issuers looking to enhance their ESG-iness.
ESG has to be one of the most overblown topics in our industry. It gets way more attention than it deserves. The duty is to provide options that have a high likelihood of providing better than average returns at a reasonable cost. Anything outside of that is just fluff and sales spin. If the snowflakes of today's society want to "feel good" about what they invest in, that's fine & dandy, but if I'm a fiduciary it won't be at the expense of the stated duty. Now get off my lawn.
Same summary as question #2...they were making an absolute mountain out of a molehill...in my humble opinion.
See my prior comments on ESG overall. The challenge is that we won't know for at least 15-25 years if this has helped or actually hurt participant outcomes and their investment results.
If managers want to consider ESG within the context of overall evaluation of the investment then they can without labeling it an ESG fund. Anyone dumb enough to put this as a front and center issue ahead of other investment criteria deserves what they get. What's next, we need to accommodate those who want a Vice fund? It would likely outperform the ESG.
I'm still using the term "socially responsible" as part of the plan materials so that the few participants that want to have it, actually can. At the employer level, even my not-for-profit clients are not very interested in ESG.
ESG is a joke and is being pushed by for a political agenda.
ESG as a topic represents a further erosion of the fundamentals of capitalism in today's environment; it is a "solution" looking for problems that don't really exist.
ESG is a joke and more often than not a scam that lines pockets of others and cares not for investors best interests
ESG has been in retirement plans for LONG time (decades, in the case of 403(b) plans) and a lot of the recent regulatory posturing has been much ado about nothing, imo.
I think many ESG funds are essentially closet-index funds, once they have enough investments within the fund. So if you know the asset class represented by the ESG fund then you'd get a similar return as an index fund for that asset class (minus the extra fees you'd likely pay for the ESG fund in most cases).
I just wish they'd stop this ping-pong of rulemaking and land somewhere that won't require us to reevaluate every 4 or 8 years.
I don't like an activist DOL. I think the ruling flies in the face of the edicts of ERISA's risk vs. return mandate. I also believe the DOL is setting a problematic precedent Based on political bias. Pecuniary considerations should always be 1st and foremost for plan fiduciaries. I'm afraid that this is just the 1st step for this DOL and that the next step will be that they will require ESG considerations when making plan investment selections.
Most small to mid-size companies have shown little or no interest. More have concerns if anything.
Thanks to everyone who participated in this week’s NAPA-Net Reader Radar poll!
