What follows are fiduciary hacks and constructs that pertain to the DOL’s recent rulemaking regarding ESG/SRI.
In the interest of timely reporting, I’m going to present this post in outline form. For the sake of brevity, I’m not going to provide a lot of details on the 60-year history of the ESG/SRI movement.
Also, I won’t present too much in the way of supporting figures—again, in lieu of timely reporting. However, I will tell you that I have been providing expert opinions on ESG/SRI for more than 30 years.
For the purposes of this post, the terms ESG and SRI are intended to be inclusive of minority- and women-owned business enterprises (MWBE) and money managers, economically targeted investments (ETI), indigenous investing, mission-based investing (MBI), and impact investing.
It will not apply to sustainable investing, which has different investment and governance objectives.
It’s the same
In the grand scheme of things, there are no material changes to the DOL’s position (ERISA attorneys will fight me on this opinion. For example, they’ll point out the number of times a coma has been replaced with a semi-colon).
It’s political
Over the last 30 years, we’ve seen Republican administrations tighten the reins, and Democratic administrations ease up on interpretations.
It’s procedural prudence
Always demonstrate that plan governance is inclusive of fiduciary best practices and generally accepted investment management principles. Fortunately, ESG/SRI has been recognized for more than 30 years as an important element of a sound, long-term decision-making process.
It’s not smart to paint a bullseye on your back
Never make the statement that the primary investment objective for a retirement plan is to advance any cause other than acting in the best interests of participants (we would offer different advice for foundations, endowments, and personal trusts).
They win some, they lose some
When active managers outperform passive strategies, ESG/SRI also will tend to outperform. The opposite is true when passive strategies outperform active managers. The argument that ESG/SRI will always underperform is stale and outdated.
It comes with a cost
ESG/SRI has a history of costing more to implement – something you need to watch as part of your procedurally prudent process. If there’s an Achilles’ heel to ESG/SRI, it’s cost.
In the case of DC plans
When offering an ESG/SRI investment option always offer alongside a general investment option from the same asset class or peer group. This way the participant is deciding to implement ESG/SRI, not the plan sponsor.
In the case of DB plans
Your first approach should be to apply the same due diligence criteria to an ESG/SRI universe of funds/managers that you normally would apply to any other asset class or peer group. For the past 25 years, a reasonable percentage of ESG/SRI funds have screened quite favorably.
A fallback position is to create a new asset class. For asset optimization and modeling purposes, define the new asset class as having a much lower correlation, a much higher risk premium, and a comparable expected return to domestic equities.
This approach tends to create greater opportunities for emerging money managers, and new ESG/SRI strategies and products.
In the case of Taft-Hartley plans
You need to be sensitive to ETI (Economically Targeted Investments). Taft-Hartley plans will tend to want to seek out investment options that generate job opportunities for union members.
In the case of indigenous fiduciaries
You need to be sensitive to investment strategies that consider traditional values and wisdom and recognize Indigenous sovereignty rights.
A final comment; a better approach for introducing ESG/SRI is to talk about the leadership and stewardship responsibilities of trustees and investment committee members.
For example, asking the members of an investment committee the following: How can you demonstrate to plan participants that you’re a good steward? Or: What can the plan sponsor/employer be doing to help build trust and increase employee engagement?
The answers to these types of questions will move the discussion towards ESG/SRI without tripping a flare that would alert the DOL.
Don Trone is one of five Co-founders of 3ethos. The other Co-founders include Dr. Sean Hannah, Mary Lou Wattman, Rear Admiral Steve Branham, USCG (Retired), and Dr. John Sumanth. 3ethos is conducting original research in the field of Behavioral Governance—the study of the interrelationships between leadership, stewardship, and governance.
Don Trone is regarded as the ‘Father of Fiduciary’. He is the CEO and co-founder of 3ethos and the CEO and one of the co-founders of the Center for Board Certified Fiduciaries which is affiliated with the Wake Forest University School of Professional Studies. CBCF is the only organization offering graduate-level training in the leadership and stewardship roles of fiduciaries.
