US investor group urges DOL to rethink ESG law

The US Impact Investing Alliance has urged the Department of Labor to reconsider the introduction of a controversial law governing ESG in investment portfolios, asking them to suspend the rulemaking process until normality returns. 

The group has written an open letter to the DOL, objecting to a proposed rule that would see severe restrictions imposed for US pension funds and how they engage with ESG strategies. 

In stark contrast to the UK’s regulatory endorsement of ESG, the US now seeks to unwind decades of progress made in this area. The law would restrict funds from making ESG investments unless financial returns or risk mitigation was being clearly prioritised.  

With market participants only given 30 days to respond (the proposed rule was announced at the end of June), both the timing and the content of the law have drawn criticism. 

In its 14-page letter, signed by US Impact Investing Alliance Executive Director Fran Seegull, strong disagreement was expressed with the DOL’s argument that ESG factors are immaterial to performance and can undermine returns. 

Citing academic evidence to the contrary, the letter reads: “The Alliance believes that considering material ESG factors is in alignment with fiduciary duty, and that discouraging such considerations could have harmful effects on plan beneficiaries.” 

Read Minerva’s response to the ERISA ESG Consultation

Minerva, too, has written to the DOL, citing an “increasing volume of academic and actuarial studies and regulatory frameworks” that conclude that adding ESG considerations to investment strategies is beneficial to long-term risk adjusted returns.  

“The Proposed Rules would, we believe, actively deter otherwise prudent fiduciaries from taking account of ESG factors in their investment decision making,” Minerva’s letter states. “Indeed, such is the value of ESG factors that increasing numbers of investors are applying sustainability considerations to their entire investment strategy as a default option. The Proposed Rules, would, therefore, create an unnecessary burden and interference in a well-managed, risk-aware investment process.” 

Echoing these concerns, the US Impact Investing Alliance also claims the DOL’s “arbitrarily burdensome” law would produce anticompetitive implications. In particular, the group wants the DOL to reconsider the rule’s “economically indistinguishable” standard which it argues is impossible to meet and to review the apparent prohibition of ESG-screened funds included as part of the QDIA.  

These are the latest protests to arrive with the DOL. Other investor groups and two Democratic lawmakers have officially called for an extension to the comment period – and a radical rethink.