‘Nonsensical’: DOL’s ESG Rule Clueless, Critics Say

By John Hilton

The comment period closed Thursday on a Department of Labor proposal to restrict ERISA fiduciaries from investing in ESG funds -- but the criticism is just getting louder.

The Insured Retirement Institute called on the DOL to withdraw the rule, claiming that it fails investors and fiduciaries on several fronts.

“Singling out the ESG investment category for unique treatment and scrutiny is inconsistent with well-established, principles-based ERISA regulations,” said Jason Berkowitz, IRI chief legal and regulatory affairs officer.

The ESG proposal will trigger unintended consequences, expose plan fiduciaries to additional regulatory scrutiny, and heighten litigation risks related to the selection of all plan investment options, IRI said in its comment letter.

Environmental, social and governance funds have grown more popular over the past several years, particularly among younger investors. And although ESG funds lagged in returns in their early years, many now show respectable results – although that is hotly debated.

“Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan,” said Secretary of Labor Eugene Scalia. “Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

The proposal would make five core additions to ERISA, according to the DOL.

'Significant' Cost

IRI noted that the ESG proposal should be consistent with the DOL’s recently issued private equity investments Information Letter and President Donald Trump’s executive order to reduce regulatory impediments to financial institutions.

The department’s cost-benefit analysis concluded that the ESG proposal will impose virtually no costs on the thousands of fiduciary service and investment product providers to the over 700,000 ERISA-governed defined benefit and defined contribution plans that the ESG Proposal may affect. IRI disputed that finding.

“The amount of time and money necessary for fiduciary service providers and others to undertake the relevant foregoing tasks will be significant,” Berkowitz said. “Plan sponsors will have to conduct the exact same analysis and incur similar legal costs plus additional expenses of hiring investment professionals to conduct a thorough analysis of all plan investments, making proper documentation, and potentially making lineup changes.”

Bradford P. Campbell, a partner at Faegre Drinker Biddle & Reath, headed up the DOL Employee Benefits Security Administration under President George W. Bush. In that role, he introduced guidance on ESG investing in 2008.

ESG guidance dates to 1994, he explained. So while the new ESG rule was not part of the DOL's 12-month regulatory calendar, "this isn't a new issue," he said.

Still, the new rule likely needs more work to clarify its meaning, Campbell said during a webcast Thursday.

"The way they've written it could theoretically mean that any investment, whether it's intended to be ESG or not, that looked at, say, a dysfunctional corporate governance situation, and used that to evaluate the investment could potentially fall under this prohibition," Campbell added.

Hundreds Of Comments

At the close of business Thursday, the ESG proposal drew more than 1,100 comments, although none were made public. Many of those comments are likely asking the DOL to do more work on the ESG rule, Campbell said.

Fred Reish, also a partner at Faegre Drinker, went further in his criticism of DOL, questioning whether the department even understands how ESG has evolved. Projecting investment performance on whether pollution might be more heavily regulated, or whether a company can grow by committing to diversity, is a very legitimate analysis, Reish noted.

"In some ways, it's nonsensical," he added. "Plan fiduciaries should be required to consider all factors which affect risk and return or justify where they cannot rather than the other way around."

The DOL seems to be employing "outdated" thinking, Reish continued, motivated by the image of a naive millennial enthusiastically pushing for poor-performing green energy investments. That's not what ESG means in 2020, he explained.

Then there's the politics of it, Reish said.

"The thing I find absolutely fascinating on it is we have a Republican administration telling investment advisors what they can and cannot consider and how they should consider it, which seems so much the opposite of what political conservatism would say," he said. "Here, they're trying to substitute the government's judgment for the private sector. It just makes no sense to me at all."

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.