A Department of Labor proposal that would likely curb environmental, social and governance investments in ERISA plans has drawn sharp criticism from the retirement community.
In a 30-day comment period that concluded July 30, stakeholders roundly admonished the Labor Department's proposal to add regulatory text that makes clear that ERISA requires plan fiduciaries in both private defined benefit and defined contribution plans to select investments "based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action," as stated in a Labor Department fact sheet.
More than 1,500 comment letters were filed from asset owners, asset managers, trade associations, record keepers, lawmakers and others, many of whom took issue with the Labor Department's initiative, which was unveiled June 23. It's unclear if the comments could prompt the Labor Department to take another look at the rule or when a final rule might be issued.
Broadly, stakeholders said the Labor Department did not sufficiently justify its reason- ing behind the proposal and said the proposal would create barriers for considering ESG risks; add to fiduciary confusion regarding if and when ESG factors may be considered material; and lead to increased documentation costs.
Aron Szapiro, Morningstar Inc.'s head of policy research based in Washington, said if the rule were to go into effect, plan sponsors would move away from any investments that consider ESG factors just to avoid the liability and additional costs, which would be to the detriment of retirement savers.
"We think it's really fundamentally out of step with (fiduciaries) using ESG factors as part of a process for investing," Mr. Szapiro said. "It's a rule that seems to be 15 years behind the current thinking, at least."
ESG investing in the U.S. has grown in popularity. Data from Morningstar show a nearly fourfold increase in 2019 over the previous year in flows into U.S. sustainable funds, at $21.4 billion, and record flows into ESG funds and into strategies based on ESG indexes in the first quarter of $10.5 billion.