Thirteen Senate Democrats would like the Department of Labor to withdraw its proposed rule on ERISA plan fiduciaries' responsibilities with respect to ESG investments because the proposal "would undermine the ability to consider firms' records on race and diversity when making investment decisions."
In a comment letter Wednesday to Labor Secretary Eugene Scalia, the senators said the country is at pivotal moment in the fight against systemic racism. "Yet, while people across the country demand accountability and reach for available tools to fight for racial and economic equity — from advocating for sweeping federal reforms to address systemic racism to taking smaller personal steps like supporting Black-owned businesses — the department is moving in the opposite direction."
The proposed rule, which was unveiled June 23, stipulates that ERISA plan fiduciaries cannot invest in ESG vehicles that sacrifice investment returns or take on additional risk. The rule 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.
In announcing the proposal, Mr. Scalia said in a news release that "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."
But the 13 senators — Patty Murray of Washington, ranking member of the Senate Health, Education, Labor and Pensions Committee; Tina Smith of Minnesota; Sherrod Brown of Ohio; Kirsten Gillibrand of New York; Tim Kaine of Virginia; Elizabeth Warren of Massachusetts; Bernie Sanders of Vermont; Tammy Baldwin of Wisconsin; Bob Casey of Pennsylvania; Dick Durbin of Illinois; Amy Klobuchar of Minnesota; Cory Booker of New Jersey; and Dianne Feinstein of California — said ESG investing allows retirement savers to support long-term change by building a system that rewards and values inclusion and diversity in corporate culture from the board to the workforce.
"By restricting ESG investing, the department's proposal would undermine a powerful tool that leverages trillions of dollars a year to drive positive social change," the senators said, pointing to data from the Forum for Sustainable and Responsible Investment, that showed in 2018 there was $12 trillion invested in ESG funds.
The senators said that plan sponsors and fiduciaries should be able to consider whether or not companies have established diverse leadership teams, whether they foster inclusive or discriminatory workplaces and whether they engage in a variety of other practices that may impact a company's performance.
"ESG-based investing is a key way to grow a plan's assets in a manner consistent with its corporate principles without sacrificing investment returns," the senators said. "Racial justice, corporate diversity and other ESG factors are increasingly a consideration in investment decisions."
Comments on the proposed rule are due July 30.
The senators are hoping it doesn't become final, concluding: "We urge you to immediately withdraw this proposed rule and refocus the department's efforts on the multitude of pressing matters facing U.S. workers in light of COVID-19, as well as the ways the department can use its authorities and tools to drive positive change, especially as it relates to systemic racism."