Analysis: with Department of Labor guidance, has the US turned a corner on ESG?

A series of developments show ESG increasingly part of the ‘mainstream’

Last week’s decision by the US government to remove a perceived obstacle to environmental, social and governance (ESG) investing has, rightly, been hailed as a turning point.

On October 22 the Department of Labor issued new guidance regarding economically targeted investments (ETIs) made by retirement plans covered by the Employee Retirement Income Security Act (ERISA), the 1974 law which sets minimum standards for private pension plans.

The move, which overturned guidance dating back to 2008, was welcomed by the likes of Morgan Stanley and the US Forum for Sustainable and Responsible Investment among many others. Pension funds had been kept back from considering such factors as exploitative labor conditions, worker rights, internet freedom, community development and environmental impact before deciding where to invest.

But this potentially landmark decision is just the latest sign of ESG activity ramping up in the US.

Legg Mason saying this week that ESG can help deliver “what everyone wants”, that’s to say strong, risk-adjusted performance over the long term, shows the extent to which the leading asset managers increasingly ‘get’ ESG.

Elsewhere, fellow fund giant BlackRock has started use its muscle, raising the ante on global stock exchanges, with its global head of corporate governance and responsible investment Michelle Edkins writing recently that leadership on ESG on the part of exchanges – and their regulators – would be welcomed.

Elsewhere, Ceres, the sustainability advocacy group, is today (October 28) launching a new report looking at the performance of US corporate boards in prioritizing environmental and social issues. Dozens of corporate directors, senior corporate leaders, investors and governance experts were interviewed for the report, View from the Top: How Corporate Boards can Engage on Sustainability Performance. The report has the backing of Margaret Foran, Chief Governance Officer and Corporate Secretary at Prudential Financial, who was interviewed for the report and wrote a report foreword.There are other initiatives where major players are showing their hand, e.g. the Natural Capital Declaration, the initiative co-convened by the Global Canopy Programme and UN Environment Programme Finance Initiative to integrate natural capital considerations across financial products and services. Just this month, Citi became an official signatory, bring the total of endorsing financial institutions to 43.

The ESG penny appears to be dropping at investment consultants too in the US. Also this month, Pension Consulting Alliance, the consulting firm with 32 pension fund clients representing over $1trn in assets said US pension plans “will be grappling with integrating sustainability issues in the not too distant future, if they aren’t already” [the report was written before the Department of Labor announcement].

The ESG industry, writes PCA analyst Sarah Bernstein, “seems poised to enter the mainstream”. She points out that equity ESG demand is “sparking new thinking, new markets entrants, new products and new hype”. And she also notes that it’s PCA’s opinion that it’s increasingly likely that some sort of sustainability framework will become standard in the US over time, most likely the Sustainability Accounting Standards Board (SASB).

Which brings us to SASB itself, which is on something of a roll too at the moment too. Again, just this week, it launched a new sustainability credential. The Fundamentals of Sustainability Accounting (FSA) credential provides education and training for professionals who are responsible for evaluating and analyzing sustainability issues that impact a company’s bottom line.

The California State Teachers’ Retirement System (CalSTRS) is backing the initiative, with CIO Chris Ailman saying the fund is encouraging its team to enroll in the FSA Credential. Ailman says: “If you want a long career in institutional investments you better start learning about the SASB disclosures. Get ahead of the crowd.” Quite so!