Investors urge DoL to pull ESG proposals

Institutional investors from around the world have urged the US Department of Labor to pull back on its proposed Financial Factors in Selecting Plan Investments Regulation and give them more time to feedback.

Retirement schemes and pension plans from the US, UK, Italy and Spain have submitted evidence to the department on why they think its proposed new rule on environmental, social and governance issues are problematic and should not be enacted.

The controversial new law would restrict funds from making ESG investments unless financial returns or risk mitigation was being clearly prioritised and has already drawn criticism from the US Impact Investing Alliance and two Democratic lawmakers.

In responses published by the DOL, the California State Teachers’ Retirement System laid out the various elements within the proposal that it felt would both complicate and increase the cost of running its investments, which would ultimately impact its members’ benefits.

“In summary, we urge the DOL to allow the existing regulations to stand without the proposed amendments,” CalSTRS letter said. “If the proposal is finalized with these amendments, fiduciaries will struggle to fulfil their obligations to deliver optimal returns by integrating all financially material risk factors which have been repeatedly proven to be pecuniary.”

The $246bn scheme also recommended an extension of the comment period to 90 days in order to allow the DOL to gather as much information as possible, “given the significant increased documentation requirements and uncertain effect of this proposed rule change”.

These claims were echoed – and added to – by other large investors, with the $27bn San Francisco City and County Employees’ Retirement System saying it “found the proposal to be lengthy and confusing”.

The scheme’s letter continued to lay out several areas that it believed needed urgent clarification: “We believe the proposal should provide clarity to fiduciaries as to when ESG factors may be included in investment decision-making and provide clarity as to what is not permissible.”

In the scheme’s opinion, it does not.

It ultimately concluded: “If the proposal goes into effect, we believe it may adversely impact the economic best interest of our beneficiaries.”

This sentiment was shared by the $56bn Maryland State Retirement and Pension System, which also said: “We believe that the proposal mischaracterises ESG integration and is likely to lead to confusion for ERISA fiduciaries and costs to plan savers.”

Montgomery County Employee Retirement Plans claimed that if the proposal went into effect, “it will undermine our ability to act in the long-term best interest of our beneficiaries”.

The Insured Retirement Institute agreed with these points, but objected to the DoL focusing on these elements at all.

“Singling out the ESG investment category for unique treatment and scrutiny is inconsistent with well-established, principles-based ERISA regulations,” it said. “Further, the ESG proposal will trigger unintended consequences, expose plan fiduciaries to additional regulatory scrutiny, and heighten litigation risks related to the selection of all plan investment options.”

For several industry-wide Chicago workers’ funds, there is “no need for the department to modify the terms… which have provided a workable framework guiding fiduciaries in determining their legal responsibilities under ERISA in making choices involving ESG investments”.

Further afield, the UK’s Brunel Pension Partnership said the proposal mischaracterises ESG integration and fails to distinguish between ESG integration and economically-targeted investing.

“This is likely to lead to confusion for ERISA fiduciaries and extra costs for plan savers,” the Bristol-based fund said. “If the proposal is finalised in its current form, we are concerned that fiduciaries will struggle to fulfil their obligations to integrate all financially material risk factors, while following proposal guidelines that appear aimed at preventing fiduciaries from taking account of these same risks.”

Another Local Government Pension Scheme member, Border to Coast, agreed, adding: “As such, it has the potential to increase investment risk and reduce potential investment returns. We therefore urge you to allow the existing guidance to remain in effect and not move forward with a final rule.”

The Spanish Telefónica Employee Pension Fund, Bridgestone Hispania Pension and Italian Pegaso scheme also added their dissenting voices.

However, the West Virginia House of Delegates Pensions & Retirement Committee said it supported the new rule, “which would prohibit retirement plan fiduciaries from sacrificing investment returns to further political agendas”.  

There has been no further response from the DoL.