The Government Accountability Office has spoken for many with the title of a new report.
The report, helpfully entitled “Clearer Information on Consideration of Environmental, Social, and Governance Factors Would Be Helpful,” doubtless speaks for many in the wake of recent guidance from the Labor Department that – to many – seemed to back off guidance from the Labor Department (albeit under the Obama administration) that had been issued in 2015 and 2016.
The report, done at the behest of three Democratic legislators (Hawaii Sen. Brian Schatz and Reps. Gerald Connolly of Virginia and James Langevin of Rhode Island, looked at:
- the use of ESG factors by U.S. retirement plans;
- the use of ESG factors by selected retirement plans in other countries; and
- DOL’s guidance on the use of ESG factors by private sector U.S. retirement plans.
The GAO looked at available private sector survey data and other documentation and interviewed government officials, asset managers and plan representatives in the United States, France, the Netherlands and the United Kingdom – from retirement plans that were “identified as leading examples in the use of ESG factors.”
And, as you might expect from that focus, the 63-page report seems largely supportive of ESG, even as it acknowledges that “few retirement plans in the United States incorporate environmental, social, and governance (ESG) factors into how they manage investments,” and that those that do “use a range of strategies.” Moreover, the GAO cites 2016 data from Vanguard that, even among the 8% of 1,900 defined contribution programs that made an ESG fund available, “few participants chose to invest in one.” Specifically, out of the total number of participants covered by Vanguard’s data, GAO explains that 18% were offered at least one of these options and 3% chose to invest in one.
Additionally, while defined benefit plans were not included in the surveys reviewed by GAO, the report says that the asset managers interviewed who provided information on the topic (five of seven asset managers) said that “few defined benefit plans in the private sector were incorporating ESG factors into their investment management although some public sector defined benefit plans were.” Those same asset managers outlined some of the issues involved with ESG investing, specifically that incorporating ESG factors into investment management presents challenges involving data, evidence, costs and complexity. GAO reported that five of the seven asset managers they interviewed said they had concerns about the quality of data available on ESG factors, and of these, three said that available data on ESG factors were not always consistent or comparable.
While the managers interviewed saw opportunities to address those concerns, and while the report claims that the majority of investment scenarios analyzed showed that incorporating ESG factors has a positive or neutral relationship to financial performance, “the perception that incorporating such factors could have a negative impact persists.”
Ironically, considering the timing of the GAO report’s publication, it notes that “some asset managers cited uncertainty stemming from DOL’s changing guidance over time as a challenge,” and that, specifically, “three of the asset managers we interviewed said retirement plans found it challenging to rely on DOL’s guidance regarding the use of ESG factors, given their view that the guidance had changed significantly with different administrations.”
The GAO report makes just two recommendations — that the Assistant Secretary of Labor for EBSA should:
- clarify whether an ERISA plan may incorporate material ESG factors into the investment management for a qualified default investment alternative (QDIA); and
- provide further information to assist fiduciaries in investment management involving ESG factors, including how to evaluate available options, such as questions to ask or items to consider.
In response, Preston Rutledge, the aforementioned Assistant Secretary of Labor for EBSA, noted that while the Labor Department neither agreed nor disagreed with the GAO’s recommendations, he explained that the agency had just published a Field Assistance Bulletin that “though not technically issued in response to your report… includes discussions of issues raised in your report.”
And so it does. However, it seems fair to say that the GAO report authors are still waiting…
