We knew there was a lot of opposition to the Department of Labor’s proposed rulemaking that would limit ESG investing in employer-sponsored retirement plans, but now we know just how one-sided the comments were.
Several investor organizations and financial industry firms released an analysis on Aug. 20 of the more than 8,700 public comments on the DOL’s proposed rulemaking on the consideration of environmental, social and governance (ESG) considerations in ERISA-governed retirement plans.
The analysis found there is overwhelming opposition to the “Financial Factors in Selecting Plan Investments” proposal. Of the 8,636 total comments in the analysis after removing the 101 extension requests and duplicates, more than 95% of comments opposed the DOL’s proposed rulemaking.
Only 4% of comments expressed support, and 1% expressed neutral views or recommended changes without clearly expressing support or opposition. Public comments were overwhelmingly opposed across individuals, investment-related groups, and non-investment-related groups. The 30-day public comment period ended on July 30.
“As we said in our comment letter, the Department of Labor’s approach is out of step with the increasingly mainstream practice of incorporating ESG considerations into investment research, and this analysis reinforces that reality, said Morningstar Head of Policy Research Aron Szapiro. “The rule as proposed would take away important options from retirement investors and deny them access to analysis on mitigating ESG risks.”
Participating organizations in the categorization and analysis of public comments include US SIF: The Forum for Sustainable and Responsible Investment, Ceres, Intentional Endowments Network (IEN), the AFL-CIO, the Interfaith Center on Corporate Responsibility (ICCR), Impax Asset Management and Morningstar, Inc.
The group summarized the comments and the constituencies that made them to provide transparency and help the public, affected parties and regulators draw appropriate conclusions from the thousands of comments submitted.
US SIF Chief Executive Officer Lisa Woll said the overwhelming response to the proposed rule reflects the growing interest in and asset flows to sustainable investing. She notes that professionally managed assets utilizing one or more sustainable investment strategies grew 38% from 2016-2018 to more than $12 trillion.
“Generating more hurdles to the incorporation of ESG criteria will have a chilling effect, leading to plan participants losing access to ESG options—many of which have outperformed their indices over time and especially during the market shock related to COVID 19. Limiting plan participant options and diversification opportunities should not be the role of the Department of Labor,” Woll said.
“Essentially, DOL is proposing to substitute its judgment, a judgment which may be more subject to political influences, for the judgment of investment practitioners on the ground who possess the responsibility and the expertise to design and administer retirement plans,” said Impax Asset Management LLC President Joe Keefe. “The proposed rule effectively substitutes activist, big government fat in place of the market.”
Deeper dive into analysis
Key findings of the analysis include:
- The vast majority of commenters were individuals, reflecting significant grass-roots investor support for sustainable investing. 96% of the 8,337 comments or petition signatures from individuals expressed opposition.
- Opposition was especially high among investment-related groups, with asset managers, financial advisors, financial service providers, asset owners, pension plans, and investment organizations either unanimous or all but unanimous opposing the proposal. Among 229 comments from investment-related groups, 94% were opposed, 2% were in favor, and 4% were mixed or neutral.
- A majority of non-investment-related firms and organizations opposed the rule, yet comments from this smaller group exhibited the highest levels of support. Among the 120 comments from non-investment-related firms and organizations, 37% of comments were in favor, a 57% clear majority of comments were opposed, and 6% were mixed or neutral.
The analysis also surfaced key themes among opposing comments, such as:
- DOL’s proposal does not make a case for a problem that requires this rulemaking and, in particular, includes no evidence that fiduciaries choose investments that are likely to have lower returns in exchange for ESG criteria being considered.
- The proposed rule largely dismisses the financial materiality of ESG issues and ignores research regarding the materiality of ESG in financial decision-making.
- The proposed rule is based on a flawed and unsupported assumption that ESG funds give up financial returns in favor of “non-pecuniary” rewards.
- Rather than subjecting fiduciaries who wish to utilize ESG criteria to additional burdens and restrictions, incorporating ESG factors into investment decisions should be considered a part of fiduciary duty.
- Excluding ESG investments from Qualified Default Investment Alternatives (QDIAs) in Defined Contribution plans is inappropriate and could harm plan participants/beneficiaries
- Singling out ESG for a heightened level of scrutiny and restriction is inappropriate.
What’s next
What comes next with the controversial proposed rule remains to be seen, but the ball is back in the DOL’s court.
The DOL could issue an extension of the comment period, as many commenters requested; issue a request for information; proceed with the rule, meaning it would be effective 60 days after date of publication of final rule in the Federal Register; or even withdraw it, as many commenters urged.
Another option is publishing a revised rule based on feedback from the comment period, which would mean an additional comment period before it could become final.
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