While asset managers and investors increasingly emphasize sustainable investment in their criteria for investing in funds and equities, the Trump Administration is proposing a rule that would limit retirement funds’ investments in retirement plans based on environmental, social, and governance (ESG) criteria.
Some of the world’s largest asset managers, including BlackRock and Fidelity Investments, oppose the proposed regulation as burdensome and limiting fiduciaries’ ability to consider financially material ESG factors when picking investments.
Critics of the plan range from those who see the proposed regulation as flawed in its assumptions that sustainable investing is not financially material, to those who see it as a rule that would limit options for participation and diversification for retirement plans, and to those that see it as a not-so-subtle push to help the oil and gas industry by limiting fiduciaries’ investments based on sustainability criteria.
The U.S. Department of Labor, which proposed the new rule in June, wants retirement plan fiduciaries to select investments and investment courses of action “based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action.”
“The Department is concerned, however, 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,” it said in the proposed rule.
During the 30-day comment period, prominent asset managers – including BlackRock, Fidelity Investments, State Street Global Advisors, and Putnam Investments – expressed concerns that limiting ESG criteria for investment also limits options for retirees, especially in light of evidence that sustainable indices have outperformed non-sustainable ones.
“The Proposal creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially material ESG factors, regardless of their potential effect on the return and risk of an investment,” BlackRock said, noting that the proposal “would impose significant costs and burdens on ERISA plans that would ultimately be detrimental to plan participants and beneficiaries.”
Fidelity Investments said that “the Proposal would result in far-reaching, harmful consequences for ERISA plans and participants, as well as a burdensome effect on plan fiduciaries if it is implemented in its current form,” while State Street Global Advisors noted that the proposed rule “unfortunately discourages such integration by U.S. private sector plan fiduciaries, potentially disadvantaging plans, participants and beneficiaries by restricting access to an entire type of long-term, value-driven investment that could help ensure future retirement security.”
Putnam believes “that the evidence that thoughtful integration of relevant ESG considerations may in fact improve returns and reduce risk is compelling.”
Of the total more than 8,600 comments on the proposed rule, more than 95 percent of comments opposed the proposed rule, and only 4 percent of comments expressed support, according to an analysis of the Forum for Sustainable and Responsible Investment (US SIF) and several investor organizations and financial industry firms.
“The proposed DOL rule is a thinly disguised political attack on ESG investing, with no legitimate factual basis. As the overwhelming negative response demonstrates, investors across the spectrum see environmental, social, and governance factors as a critical part of the analysis of the long-term value of investments,” Interfaith Center on Corporate Responsibility (ICCR) Chief Executive Officer Josh Zinner said.
Jon Hale, Morningstar’s director of ESG research for the Americas, wrote at the end of July, “while there is no demonstrated need for the rule other than the Trump Administration’s desire to protect the fossil-fuel industry, the biggest problem with the proposal is that it reflects a (willful?) misunderstanding of what ESG investing is about today.”
According to 2019 Morgan Stanley research, which studied the performance of nearly 11,000 mutual funds between 2004 and 2018, sustainable funds’ returns were in line with those of comparable traditional funds. Morgan Stanley saw evidence that sustainable funds are more stable during periods of extreme volatility, demonstrating lower downside risk. At times of uncertain markets, sustainable funds “may offer a layer of stability for investors looking to reduce volatility,” Morgan Stanley said.
Regardless of the Trump Administration’s ultimate motivation behind proposing the ESG rule, the world’s top asset managers say that sustainable investment is material to financial performance, especially in long-term plans. The proposal as-is will limit options for retirement plans and potentially increase costs for fiduciaries that could be passed on to the savers, the financial industry says.