Among the nearly 29,000 comments received,[i] a group of senior U.S. senators has suggested that the Labor Department pull its ESG proposal, while a dozen state Attorneys’ General are backing the same proposal.
‘Woke’ Causes
With regard to the former, rather than fulfill its stated purpose, Sens. Pat Toomey (R-Pennsylvania), Ranking Member on the Committee on Banking, Housing and Urban Affairs; Mike Crapo (R-Idaho), Ranking Member on the Finance Committee; Richard Burr (R-NC), Ranking Member on the Committee on Health, Education, Labor and Pensions (HELP); and Tim Scott (R-SC), Ranking Member of the Special Committee on Aging, comment that “…the proposal effectively mandates consideration of climate change and ESG factors in all investment and proxy voting decisions.”
Moreover, they assert that “the proposal vastly expands the circumstances in which retirement plan fiduciaries can pursue ‘woke’ ESG causes even when they provide no financial benefits to plan participants and beneficiaries. As a result, it will significantly harm Americans’ retirement savings by allowing plan fiduciaries to promote non-pecuniary policy objectives like lowering global carbon emissions and promoting 'social justice' rather than being solely focused on maximizing investment returns.”
Among the shortcomings cited in the proposal, the senators note that:
- It fails to define what ESG considerations or factors are, or explain why such terminology is an appropriate regulatory standard.
- It imposes a de facto mandate on fiduciaries of retirement plans, requiring them to consider ESG factors that are not supported by DOL’s own regulatory impact analysis (RIA).
- The steps needed to comply with the obligation are unclear and ambiguous.
Legal Liability
The letter’s authors comment that “even though DOL’s press materials suggest otherwise, the proposal does not appear to significantly change any legal liability from private class actions under ERISA and, as a result, plan fiduciaries who select ESG investments may be subject to increased litigation risk should those investments result in higher fees, inferior risk-adjusted performance, and/or less diversification.”
They continue that, “the proposal, by reminding plan fiduciaries of their potential liability under ERISA, but remaining ambiguous as to whether and when it is appropriate to incorporate ESG factors, or indeed when ESG investing is to be a mandatory investment strategy, fails immeasurably on that score.”
The letter characterizes the proposal as “fatally flawed” in not defining “the scope of ESG considerations or factors, terms which are used throughout the proposal.” This is important, they write, “because the proposal states that plan fiduciaries ‘may often’ be required to consider them,” and without that clarity, “…fiduciaries will have little idea whether the ESG factors they decide to consider comply with the DOL rule and protect them against legal action.”
(Re)Positions?
The letter also takes issue with the shift in positions between administrations, noting that “the proposal fails to explain DOL’s change in position from November 2020, when DOL stated that it was persuaded by its review of the public comments that ‘ESG’ terminology, although used in common parlance when discussing investments and investment strategies, is not a clear or helpful lexicon for a regulatory standard.” They conclude: “The proposal lacks any awareness that DOL is departing from its prior position on ESG terminology as a regulatory standard and results in an unexplained inconsistency.”
With regard to the focus on investments, the authors note that “DOL has never adopted a rule that particular investment factors must be considered as part of the fiduciary duties under ERISA,” and that “doing so now invites the creation of a regulatory ‘laundry list’ for the selection of investments for ERISA plans.” And then, there is the issue of cost—“neither the proposal’s RIA nor its preamble considers that ESG-oriented investments often carry higher fees and expenses than comparable non-ESG investments,” and they argue that the failure to address such concerns “… implies that it is appropriate to select an investment with higher expenses without demonstrating a commensurate improvement in risk-return”—an approach they commented “contradicts prior DOL concerns about unnecessary expenses negatively affecting retirement savings.”
‘Support’ Group
On the other hand, a group of a dozen state attorneys’ generals—led by California’s Rob Bonta[ii]—note that, “States have a significant interest in the success of employee benefit plans covered under Title I of the Employee Retirement Income Security Act of 1974,” and that “for a substantial percentage of our residents, ERISA-covered plans make up the bulk of retirement savings and are an important income source after retirement. In addition to affecting states’ tax revenue and public aid expenses, the success of ERISA-covered plans helps ensure that our residents have adequate financial resources in retirement.”
Their comment letter goes on to cite as “key to the success of ERISA-covered plans” the ability of ERISA fiduciaries to consider all material factors when making their investment decisions. Not surprisingly, in view of their support for the initiative, they commented that “environmental, social, and governance (‘ESG’) factors, particularly the costs and impacts of climate change, already have material effects on many industries, and the effects of climate change are likely to increase over the long-term horizons of most ERISA-covered plans.” That said, they saw the rule promulgated by the Trump administration as having “…caused confusion as to whether ESG factors can be considered at all under the category of pecuniary factors,” whereas they said “the Proposed Rule is essential to resolve any confusion and dispel the chill that the current rule imposes on ERISA fiduciaries by explicitly allowing them to consider climate change and other ESG factors.”
They go on to refer to the proposed rule as a “balanced approach, addressing the current rule’s flaws while still ensuring that the focus of ERISA fiduciaries remains the financial benefit to plan beneficiaries and participants.” The letter goes on to endorse the DOL’s proposed removal of the terms “pecuniary” and “non-pecuniary” and the amended language allowing ERISA fiduciaries to consider “any” factor that would be material to the risk-return analysis, as well as the proposed rule’s examples of ESG factors as “reminders to ERISA fiduciaries that ESG factors often do have an impact on investments.”
The AGs also supported the DOL’s proposed requirement that ERISA fiduciaries disclose the collateral benefits of QDIAs and other designated investment alternatives that are chosen through the tie-breaker rule, explaining that, “Plan participants and beneficiaries should have information about whether an individual plan that they can choose espouses collateral benefits that they may or may not endorse.”
The letter concludes, “We appreciate the opportunity to comment on this important proposal. For all of the reasons discussed above, we support the Proposed Rule and encourage the DOL to adopt it.”
And that’s just two of the comments received… this could take a while…
