The U.S. Department of Labor has initiated a behind-the-scenes industry inquiry into the use of ESG investments in defined contribution plans, a move that many say supports proposed regulations to make it harder to include socially responsible funds in retirement plans.
In an enforcement letter sent to employers with environmental, social and governance-themed funds in their investment lineups, the agency requested a slew of documents, including materials showing the "names, addresses and responsibilities of all persons or entities with responsibility for making investment decisions."
A letter viewed by Pensions & Investments gives the plan sponsor two weeks to provide the requested materials for a three-year period beginning Jan. 1, 2017. The letter is dated May 5.
"The Department seeks to better understand the plan fiduciaries' selection of ESG funds for inclusion in the plan's investment options and compliance with their duty to administer the plan prudently and solely for the purpose of providing benefits to participants and beneficiaries, and defraying reasonable expenses of administering the plan," said Thomas Licetti, New York regional office director for the Labor Department's Employee Benefits Security Administration, in the letter.
Other requested materials include investment policies and procedures, proxy voting materials, meeting notes and "portfolio statements for any investment holdings included in the plan's portfolio in whole or in part based on the consideration of ESG factors." It also requests prohibited transaction exemptions relied on for the plan's investment in proprietary funds.
The department also sent letters to registered investment adviser firms and other service providers to plan sponsors. The letters are reported to have gone out in waves from different regional offices, according to Michael L. Hadley, a partner with Washington law firm Davis & Harman LLC.
“The Department of Labor does not comment on enforcement activities,” said a Department of Labor spokesperson on Aug. 21.
The Labor Department's inquiry, which began before the agency's release in June of proposed regulations to restrict the use of ESG funds in retirement plans, is largely seen as a way for the DOL to understand how plan sponsors are making decisions regarding their ESG investment options.
"I think the DOL is generally reviewing both through its guidance and enforcement programs how ESG is taken into account as part of the retirement plan investment process," said David Levine, a principal at Groom Law Group in Washington.