The two proposed regulations of the Department of Labor in the last eight weeks will largely boost sustainable investment options and strategies in retirement plans. These proposals would reverse the Department of Labor’s 2015 and 2016 guidance disregarding the growing consensus among academics, retirement plan fiduciaries and professional wealth managers that responsible companies are likely to exit the long haul.
The first measure, “Selecting Financial Factors in Plan Investments,” now in the final stages of the approval process, will discourage 401 (k) and other qualified retirement plans from offering funds from managers that focus on environmental, social and governance (ESG) factors Let’s consider. In their due diligence.
Support for the measure has certainly diminished. A group of investor organizations and financial firms analyzed more than 8,700 public comments on the proposed rule and found that only 4% of the comments expressed support. Some 95% of the comments – among individuals, investment-related groups and non-investment-related groups – were strongly opposed, and 1% expressed neutral views or did not expressly support or oppose.
The 30-day public comment period expired on July 30 and the Labor Department is likely to implement the proposal before the end of the year.
The second proposal, “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” announced at the end of August, would limit the ability of retirement plans to hold the company’s leadership accountable through proxy voting. It alleges that proxy measures are very important for public companies.
A basic misunderstanding
This argument is a basic misconception of how financial professionals have considered ESG criteria in their investments and how proxy voting practices increase the long-term value of an investment. Due to inconsistent corporate disclosure rules, investors often file proxy proposals to obtain relevant ESG information.
Both propositions represent a solution in search of a problem. They state that investment managers and plan-related schemes promote social goals over sound investment analysis, but proposers fail to cite a single instance that has occurred or taken any related enforcement action.
In addition, the agency does not accept any of the dozens of studies that can achieve better investment results by considering ESG issues. Morningstar found that during the stock decline in the first quarter of 2020, two out of all 26 ESG indexes suffered less losses than their traditional counterparts. Long-term studies from Morgan Stanley and MSCI have found that there is no financial trade-off in returns given by ESG funds relative to traditional funds. Additionally, a 2018 report by the Government Accountability Office (GAO) reported that 88% of academic studies reviewed found a neutral or positive relationship between ESG information use and financial performance.
The market has already spoken, setting aside the academic debate over ESG. According to the US SIFF Foundation’s 2018 report on US Sustainable, Responsible, and Impact Investing Trends, as of 2018, more than four dollars were each invested under professional management using ESG criteria. Morningstar has reported that in 2020, funds running out of traditional funds flow.
Read:Sustainable investment flows have broken records in 2020. what’s going on?
Far from giving ESG concessions, professional money managers accurately analyze ESG factors due to risk, return, and fiducial considerations. They know that poor policies and practices can damage the reputation of companies, affect consumers and cause stock-price declines. Climate change is widely recognized as an environmental and financial risk for companies. Similarly, companies that fail to promote the real and meaningful challenges racial equity face.
Investors are coming to recognize that companies with better policies and practices and more robust corporate governance will perform better in the long term. A 2018 US SIF Foundation survey of US permanent investment money managers with total assets of over $ 4 trillion found that three-quarters of respondents employ ESG criteria to improve returns and reduce risk over time, And 58% cited their discretionary duty as an inspiration. .
In 2020, traditional funds flowed into conventional funds.
The Labor Department’s proposals would largely suppress an existing regulatory system that was already functioning. In 2015 and 2016, President Obama’s Department of Labor gave careful consideration to these issues and issued an Interpretive Bulletin clarifying that subsidiaries of ERISA-governed retirement plans were “inherently ambiguous or justified as requiring special investigation Investments do not need to be treated as they take into account environmental, social, or other such factors. ”The Second Interpretive Bulletin considered that shareholder rights, including voting proxies, are important to long-term shareholder value and conform to discretionary duty Huh.
These new proposals are not going to zero. They are part of the broader efforts of the Trump administration that create barriers to investment practices focusing on environmental, social or governance issues. The Securities and Exchange Commission is currently seeking to create its own constraints on the subject, including the roles of proxy voting firms, fund names and shareholder rights.
By tying the scales when considering investments and considering ESG criteria against the use of proxies to encourage better administration and better disclosure, the Labor Department prohibits sponsoring proposals, so that they can fulfill their obligation . It should maintain current practices related to the use of ESG criteria and proxy voting.
Lisa Wool is the CEO of US SIF: The Forum for Sustainable and Responsible Investments. Follow him @LisaWoll_USSIF. Judy Mars is a former Deputy Assistant Secretary in the Department of Labor.