DoL rule won’t be enough to stem ESG chill in US

LGIM America's head of stewardship, John Hoeppner shares thoughts on the new rule from the US Department of Labor and 'double standards' around ESG.

The US Department of Labor’s (DoL) new rule, which reverses Trump-era barriers to workplace schemes considering ESG, will not be enough to stem the chill created by the anti-ESG backlash, according to John Hoeppner, head of US stewardship and sustainable investments at Legal & General Investment Management’s (LGIM) US arm. 

Last week, the DoL released its final rule, clarifying that US workplace pension schemes can consider ESG factors when selecting investments, including for default funds and exercising their shareholder rights around proxy voting. 

Hoeppner told Responsible Investor that it is “absolutely is true that that the DoL rule was the number one blocker of corporate pensions considering ESG in the US”. An informal survey of investors overseeing retirement assets undertaken by LGIM on the topic confirmed as much, he said.   

But as to whether it will be enough, Hoeppner replied: “I’m convinced that nothing will be enough, I don’t think it actually mattered what the wording was – it’s the political climate… I’m a little sceptical on that side… it doesn’t matter how strong the wording was.”    

Anti-ESG sentiment emanating from Republican politicians in the US is well documented, but Hoeppner said that this backlash is “just one example”. “I really mean political divisiveness that separates groups of people from having quality rational discussions.” 

As to whether this hostile political environment will be a permanent chilling factor on efforts to deal with key ESG issues, like climate risk, he told RI that he doesn’t think it will be permanent as ESG as a concept becomes understood more as “improved descriptions of contextual data” used to inform investments.

Hoeppner also said that he felt that there is a “double standard” when it comes to the ESG debate. He pointed out that in the US you can invest in an emerging markets or growth fund based on the belief that over the long run they could produce better returns than a broad market index. “But the moment you add ESG in, it becomes political and emotional,” he said.  

The DoL’s Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights rule was published on 22 November, following consultation on a draft rule put out in October 2021. 

Outgoing rules laid down during Trump’s presidency, which only came into effect in January 2021, required workplace pension schemes to solely consider financial factors when selecting investment funds or voting proxies.  

But following its consultation, the DoL concluded that they “unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially”.  

Lisa Gomez, assistant secretary for employee benefits security at the DoL, said the new rule, “will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments”. 

Hoeppner told RI that his initial take on the 236-page rule is that DoL has been a “bit conservative with their wording”.

“They’re careful to stress that the rule is completely and utterly outright financial, which is probably a safer thing to do. I get it.” 

An area that still lacks clarity for Hoeppner is the distinction between ESG integration and investments that have specific ESG objectives. 

“The question I was looking to be addressed but which is unclear to me was the difference between plain broad ESG integration, which is now practiced in every form of active management, versus strategies with [ESG] investment objectives. 

“So, if you have a strategy, which is trying to decarbonise at some rate, while still outperforming the broad market, that now has a slightly different objective than just ESG integration,” he explained.  

One thing the rule does do is remove the excuse from influential players in the 401k plan sponsor space who have been slow to recommend climate-orientated strategies on the grounds of legal uncertainty – a position that they will now have to retreat from, Hoeppner said.  

“What funds are allowed on a 401k line-up could change dramatically and the battle is now whether they are standalone ESG strategies or defaults. It could absolutely change where flows go,” he said. 

In the 2022 proxy season, new shareholder proposals were filed at Microsoft, Campbells Soup and Amazon by US non-profit As You Sow calling on the companies to report on how their retirement plan options align with their own stated climate policies.  

Hoeppner told RI that while he liked the effort and creativity of the proposals, for him, they were “a little bit too aggressive”. 

“I think the shareholder proposal process is the wrong way to drive that type of change at a company. What I’d really like to see is a petition by 500 employees calling for an ESG option to be added to their 401K. To me, that’s a lot smarter than a third-party group filing a shareholder resolution, which is then supported by ESG-inclined investors.”