A proposal from the Department of Labor stipulates that ERISA plan fiduciaries cannot invest in ESG vehicles that sacrifice investment returns or take on additional risk, which sources say could curb environmental, social and governance investments.
"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," Labor Secretary Eugene Scalia said in a news release. "Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers."
ESG investing in the U.S. has grown in popularity. Data from Morningstar Inc. 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 indexes in the first quarter of $10.5 billion. In Europe, ESG investing is even more mainstream. European funds devoted to sustainable investing attracted a record €120 billion ($135 billion) from investors last year, according to Morningstar. Also, European funds that incorporate ESG strategies held €668 billion in assets, up 58% from the prior year.
The proposal is intended to raise some significant questions about ESG investing for ERISA plan fiduciaries, said Michael P. Kreps, Washington-based principal at Groom Law Group. "It's an attempt to throw some cold water on ESG investing practices that have developed over the last decade or so," Mr. Kreps added.
The proposed rule, which was published June 23, would add regulatory text that makes clear that ERISA requires plan fiduciaries to select investments "based on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action," according to a Labor Department fact sheet.
Moreover, the proposal would require fiduciaries to consider other available investments to meet their prudence and loyalty duties under ERISA and outlines the requirements for selecting investment alternatives for 401(k) plans that ostensibly pursue one or more ESG-oriented objectives in their investment mandates or that include such parameters in the fund name.
The proposal also "acknowledges that ESG factors can be pecuniary factors," but only if the economic risks or opportunities associated with them are material, according to the fact sheet.