The Department of Labor's proposal to seemingly curb the rise of ESG investing in ERISA-covered retirement plans is shortsighted and possibly harmful to plan sponsors and their participants.
Labor Secretary Eugene Scalia misses the point on where the financial world already is with ESG investing when he says: "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."
It has become increasingly apparent that ESG investing can very much be in the financial interest of the plan. And it's already so much in the fabric of how asset owners and money managers invest, that the DOL position is sure to cause confusion and unwanted (and unnecessary) litigation risk.
The proposal appears to take aim at manager funds specifically marketed as ESG products, but so many managers use ESG screens or internal policies as part of their overall investment and risk management processes without labeling individual strategies as "ESG." Research firm Opimas recently said the value of global assets applying ESG data to drive investment decisions has almost doubled over four years to $40.5 trillion in 2020. Opimas said not all products that integrate ESG criteria into their investment strategies are labeled as "ESG" or "sustainable," with non-ESG products also using sustainability data as a source of insight on portfolio companies.
While the DOL "acknowledges that ESG factors can be pecuniary factors" only if the economic risks or opportunities associated with them are material, at what point is something "too ESG?" And who decides that? How much needless litigation will arise from this, both for investing in and avoiding ESG strategies?
A plan sponsor of a 401(k) plan would more likely be performing its fiduciary duty by adding an ESG investment option as a legitimate diversifier, while also giving participants a chance to invest according to their own beliefs.
ESG strategies have been shown to outperform broad market indexes, especially following the COVID-19 pandemic this year. Europe is already turning to a full-fledged ESG-regulated investing regime while other parts of the world also are looking to make this transition. The DOL's shortsighted action could cause U.S. investors to miss out on the investments that are shaping the future of the global economy and remain with old-world strategies that don't represent just how far we have come.