DoL rules main barrier to ESG uptake, says LGIM America’s Head of US Stewardship

Litigation fear behind ESG inertia among US asset owners, Legal & General’s John Hoeppner tells RI

The single biggest obstacle to ESG uptake in the US is the Department of Labors’ (DoL) rules and interpretations, according to Legal & General Investment Management America’s Head of US Stewardship and Sustainable Investments, John Hoeppner.

He told RI: “When you take a huge step back and consider what is really holding the US market back, it is still just one singular thing: market sensitivity to the DoL —their interpretations, rulings on ESG integration and the ripple effect of litigation fear that causes investment committee inertia.”

Trump-era rules requiring workplace pension schemes to solely consider financial factors when selecting investment funds or voting proxies were introduced in January. Many in the sustainable investment industry saw those changes to the Employee Retirement Income Security Act (ERISA) – the rules that govern workplace pension funds, like 401k plans, and which are enforced by the DoL –  as a blatant attempt to prevent scheme fiduciaries from considering ESG factors. 

The changes to ERISA took place just days before President Joe Biden took office, and, as many expected, the DoL announced in March that it would not enforce them until further guidance had been published.

Then in May, as part of his executive order on climate-related financial risks, Biden asked the DOL to “consider publishing”, by September, a proposal to “suspend, revise, or rescind” the controversial rules – a move welcomed by investors.  

There has been a marked shift in attitudes towards ESG and climate issues by the country’s federal financial regulators since Biden became President, and none more so than the US Securities and Exchange Commission (SEC).  

Much recent attention has been on the SEC’s plans to introduce what looks likely to be mandatory ESG disclosures for US companies  – which, it is hoped, will help direct capital towards more sustainable assets. 

Hoeppner, however, told RI that “US asset owners will remain cautious and only make modest ESG advances” until there is “greater comfort around fiduciary liability”.

Legal & General Investment Management America manages around $241bn on behalf of its clients, which includes US corporate pensions schemes.  

Last month, As You Sow published its Corporate 401(k) Sustainability Scorecard, assessing the sustainability credentials of Amazon and Comcast’s pension funds. The US-based shareholder advocacy group found both corporate giants to have investments in high emitters and controversial sectors, including private prisons, military weapons and tobacco – much of it through the Vanguard default funds. As You Sow plans to extend the scorecard to other S&P 500 companies and push them to adopt sustainable default options for their 401(k) plans, or ensure sustainable strategies are clearly offered to employees.