Is Trump Bid to Curb ESG to Protect Retirees or Oil?: QuickTake

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In June, the U.S. Department of Labor proposed a new rule that would change the Employee Retirement Income Security Act of 1974 (ERISA) to require those overseeing pension and 401(k) plans to always put economic interests ahead of what it called “non-pecuniary” goals.

The agency said the change is intended to provide clear regulatory guideposts for plan fiduciaries “in light of recent trends” in ESG investing, which stands for environmental, social and governance. “Private employer-sponsored retirement plans aren’t vehicles for furthering social goals or policy objectives that aren’t in the financial interest of the plan,” Secretary of Labor Eugene Scalia said. The proposal acknowledges that ESG factors can be “pecuniary factors,” but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The new rule also adds requirements for more documentation when fiduciaries are choosing among truly economically “indistinguishable” investments.

3. Who is resisting the change?

Fidelity Investments wrote in an 11-page letter to the Labor Department that the proposal’s assumption that ESG investment strategies sacrifice returns, increase risks and promote goals unrelated to financial performance isn’t “well grounded or supported by much of the emerging data.” BlackRock Inc. said the Labor Department recommendation is “overly prescriptive and burdensome.” State Street Global Advisors, Putnam Investments and Legal & General Investment Management are among numerous other asset-management firms that also oppose the Trump administration plan.

4. Do ESG strategies cost investors money?

The asset managers say that’s an outdated view, and they have some data to back that up. A study of almost 11,000 funds by Morgan Stanley found that so-called sustainable funds had lower downside risks and performed on par with traditional funds from 2004 through 2018. Sustainable funds in the U.S. have outperformed so far in 2020, according to research from Chicago-based Morningstar Inc. Meanwhile, ESG-focused funds are more popular than ever: An estimated $24.1 billion flowed into them this year as of July 31, surpassing the calendar-year record of $21.4 billion set in 2019, according to Jon Hale, director of ESG research for the Americas at Morningstar.

5. What do critics see as the rule’s real goal?

They point to an executive order Trump issued in April 2019 directing the Labor Department to inquire whether there are “discernible trends” in how retirement plans subject to ERISA invest in the energy sector. Money managers have been reducing their stakes in fossil-fuel companies because of growing concern about the global warming, and the broader global outcry over the climate crisis it has caused.

6. How big a shift has that been?

A Standard & Poor’s index that tracks the performance of oil and gas exploration and production companies has dropped 47% this year, and energy stocks now account for 2.3% of the benchmark S&P 500 Index, down from 16% as recently as mid-2008. Managers of ESG funds typically avoid polluters such as fossil-fuel companies.

6. What impact would the rule have?

The irony is ESG funds aren’t available today in the vast majority of 401(k) retirement plans, so the immediate business impact would be minimal if the rule is adopted, Hale said. However, an increasing number of fund management firms have been anticipating growing demand in the retirement market for ESG offerings, so the longer-term business consequences could be substantial, he said.

7. Is this the only fight over ESG?

The Labor Department also seeks to limit the voting powers of investors. In a proposed rule change, fiduciaries and other asset managers would be prohibited from exercising some shareholder rights, including submitting proxies concerning a retirement plan unless the issue has an “economic impact.” The recommendation would undermine the shareholder proposal process that “has been one of the most important factors in putting ESG at the top of the agenda for U.S. companies,” said Fiona Reynolds, chief executive officer of the Principles for Responsible Investment, the world’s biggest industry body for social investing. And the Securities and Exchange Commission is weighing in on a separate ESG matter, too.

The SEC is reviewing whether money managers are engaging in false advertising when they promote ESG funds. In March, the regulator asked whether ESG products should have to follow existing rules that require a fund’s name to broadly match what it invests in. In July, SEC Commissioner Elad Roisman said that asset managers should explain how such labels fit into a product’s characteristics, objectives, strategies and constraints. Investors might not know whether products actually are environmentally friendly, he said, referring to a practice known as “greenwashing.”


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