Are the ERISA amendments a ticking time bomb or a shakeout for ESG hype?

DWS among those calling for collaboration to block changes

The clock has just begun ticking on the US government’s attempt to tighten up the wording on ESG issues for private-sector pension plans – a move opposed as retrograde and confusing by some sustainable investment advocates but defended as a shake-out for ESG hype by others.

The proposed changes to the Employee Retirement Income Security Act (ERISA) were published on June 30th on the Federal Register, the official journal of the US government — meaning there are less than 30 days for opponents to muster their opposition.

The Principles for Responsible Investment (PRI) said it “mischaracterises ESG integration and fails to distinguish between ESG integration and economically targeted investing” in a way that would likely lead to confusion for ERISA fiduciaries. The US Sustainable Investment Forum has said it could have a “chilling effect”.

The most obvious tactic will be for investors to seek to slow down the clock on the proposals, with the PRI calling for its signatories to write to the DoL requesting an extension to the consultation period. The hope is that a 90-day comment period would take it into the autumn, just as the election starts to loom.

Heather Slavkin Corzo, Head of US Policy at the PRI, told Responsible Investor that the PRI is working with its largest signatories, other industry bodies and labour union umbrella body the AFL-CIO on doing what they can to mobilise opposition. She said the Department of Labour must have more pressing issues at this time of pandemic.

She put the chances of the proposal going through in its current form at 50/50. The PRI has only one ERISA signatory, but ERISA plans represent a multi-trillion dollar asset pool and changes could have a knock-on effect to other pension plans and send a message to fund managers.

Murray Birt, Senior ESG Strategist at asset manager DWS, said on LinkedIn (in response to last week’s Responsible Investor story), that he had discussed the issue internally: “I think a large coalition is needed!”

But not all investor voices oppose the DoL move. AllianzGI, declaring a “contrarian perspective”, sees it as a “good shakeout” for asset managers that have hyped ESG without substance.

And Lothian Pension Fund Portfolio Manager & Responsible Investment Lead, David Hickey, in the same thread as Birt, said: “Having read the RI report (and not the DoL documents) I'd conclude there's little to worry about here.”

“I think they are saying that you need to evidence that ESG factors are broadly positive in risk return terms. We already have to do that over here as part of our fiduciary duty. You know as well as anyone we can't just present to our trustees that ESG = Better, and the way I read this is that the DoL are saying the same.”

But Just Capital’s Chief Strategy Officer Alison Omens, a former aide to Obama-era Labour Secretary Tom Perez, spoke for many when she said the proposed “feels like it was written 50 years ago”.

The issue has been a political football over the years – the pendulum swung one way under Perez and has now swung the other under his Republican successor Eugene Scalia, an ex-partner at corporate law firm Gibson Dunn. So lawyers will no doubt advise their ERISA clients to err on the side of caution.

The DoL proposal cites research finding that there is “no consensus about what constitutes a genuine ESG investment, and ESG rating systems are often vague and inconsistent, despite featuring prominently in marketing efforts”.

It is also concerned that investment products may be marketed to ERISA fiduciaries on the basis of purported benefits and goals unrelated to financial performance, for which it cited articles in the Wall Street Journal and New York Times.

The Department believes that providing “further clarity” will help safeguard the interests of beneficiaries.

Comments must be submitted by July 30. As at the time of writing (July 1), there had been five comments received.

Meanwhile, the DoL has made a proposal to amend ERISA to permit investment advice fiduciaries to receive compensation for their advice.