In somewhat passive-aggressive language, the Government Accountability Office called on its Washington-based brethren at the Department of Labor to do something about the confusion surrounding environmental, social and governance factors in retirement plans.
“ESG factors have emerged as a way for investors, such as retirement plans, to capture information on potential risks and opportunities that may otherwise not be taken into account,” GAO’s study noted.
For example, climate change is expected to have widespread impacts according to “a key federal study” and may pose significant financial risks for long-term investors, such as retirement plans that must manage risk to provide benefits for many years to come.
Alluding to ESG popularity in Europe, it said that “a number of large plans in other countries have adopted ESG strategies, but less is known about their use among U.S. plans. Given the emerging use of ESG factors, GAO was asked to examine how such factors are used by retirement plans in the United States and other countries.”
Specifically, it examined: (1) the use of ESG factors by U.S. retirement plans, (2) the use of ESG factors by selected retirement plans in other countries, and (3) DOL’s guidance on the use of ESG factors by private sector U.S. retirement plans.
What GAO Found
Claiming few retirement plans in the United States incorporate ESG factors into their investments, the GAO blamed “inconsistent data and regulatory uncertainty” for creating challenges, citing interviews with seven asset managers.
“In the United States, the Department of Labor’s (DOL) guidance for private sector plans identifies ESG factors as proper components of investment analysis, but does not fully address uncertainties plans may face,” it wrote. “In particular, sponsors of defined contribution plans face uncertainty about whether they may use ESG factors in a qualifying default fund—a widely used option in which a fiduciary is generally not liable for investment losses.”
“DOL’s mission,” it added, “includes assisting and educating plan fiduciaries. Providing clearer information about how to use ESG factors would help fiduciaries better understand whether and how to consider these potentially material risks. DOL is also considering steps to collect data on the use of ESG factors by retirement plans.”
The GAO, therefore, made two recommendations to the DOL, including that DOL clarify whether the liability protection offered to qualifying default investment options allows use of ESG factors. DOL neither agreed nor disagreed with GAO’s recommendations.