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US industry groups respond to government proposals to limit ESG

New rules may significantly limit the ability of workplace pensions to invest in ESG funds

US industry groups have slammed new US government proposals which aim to limit the ability of pension funds to invest in ESG-focused funds.

The proposed rules from the Department of Labor (DOL) will require employer-sponsored retirement plans which are considering ESG-focused investments to show that these investments are expected to perform at least as well as similar non-ESG investment options.

In a release, Labor Secretary Eugene Scalia said: "Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan."

The DOL acknowledged that ESG factors could be material, “but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories.”

In an assessment of the proposals, law firm Stradley Ronon said that, if passed, administrators and sponsors of pension plans would “face a tall order in incorporating ESG factors” due to the increased compliance risk arising from having to compare ESG investments against available alternatives.

If passed, the proposals would amend the 1974 Employee Retirement Income Security Act, known as ERISA, which describes the fiduciary responsibilities of administrators overseeing employee pension plans. The draft rule is currently out for public comment for 30 days and will come into effect 60 days after publication in the Federal register.

Responding to the announcement, American sustainable finance body US SIF described the proposals as being “out of step” with investment professionals who increasingly regard ESG factors as impacting investment performance.

"Private employer-sponsored retirement plans are not vehicles for furthering social goals"

Lisa Woll, CEO of US SIF, the Forum for Sustainable and Responsible Investment, said: “The proposal would put a substantial additional burden on fiduciaries who wish to utilize ESG investments by requiring additional investment analysis and documentation requirements in the 'rare circumstances when fiduciaries are choosing among economically indistinguishable investments.'

“Generating more hurdles to the incorporation of ESG criteria will have a chilling effect, leading to plan participants losing access to ESG options.”

The American Council on Renewable Energy (ACORE), the trade body for US renewables, described ESG investments as “often performing better than non-ESG equivalents” and said it would engage the DOL “to help them better understand the benefits of ESG investing”.

ACORE CEO, Gregory Wetstone, said: “The Department of Labor’s proposed rule is a clear step in the wrong direction, and one that seems intended to hamstring one of the nation’s most important and fastest-growing trends in finance: Environmental, Social and Governance (ESG) investment.”

The DOL has issued non-binding guidance on ESG factors in the past, most recently in 2018 when it reminded fund administrators not to accept lower returns from ESG investments, and warned them from immediately concluding that ESG factors were economically relevant.

The latest move from the DOL comes amid surging demand for ESG funds, after many reported market-beating investment performance during the recent market volatility caused by Coronavirus.

Despite scepticism towards ESG from the Trump administration, market regulators are currently awaiting proposals on how to develop the US’s sustainable finance sector as it seeks to close the gap with other jurisdictions – in particular the EU. 

Former Goldman Sachs risk chief Bob Litterman is currently leading a regulator-appointed working group which is due to present a report on the topic in July. Last month, the Securities and Exchange Commission was urged by one of its committees to develop standardised rules for ESG disclosure to avoid US firms becoming “rule-takers”.