Several high-profile Republican senators sent a strongly-worded letter to Labor Secretary Marty Walsh on Friday expressing concern over the department’s recent environmental, social, and governance (ESG) retirement plan directives.
The group, including Pennsylvania’s Pat Toomey, Idaho’s Mike Crapo, and South Carolina’s Tim Scott, specifically mention “woke” ESG causes that they said provide no financial benefits to participants and mentioned the potential liabilities that can result.
“[The] DOL claims that the proposal will simply ‘remove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance factors when they select investments and exercise shareholder rights,” the senators noted.
However, the senators claim that in reality the proposal effectively mandates consideration of climate change and ESG factors in all investment and proxy voting decisions.
“In addition, the proposal vastly expands the circumstances in which retirement plan fiduciaries can pursue woke ESG causes even when they provide no financial benefits to plan participants and beneficiaries,” they add.
‘Non-pecuniary’ policy
As a result, it will “significantly harm Americans’ retirement savings by allowing plan fiduciaries to promote non-pecuniary policy objectives like lowering global carbon emissions and promoting ‘social justice’ rather than being solely focused on maximizing investment returns.”
Their criticism stems from what they say is the proposal’s failure to define what ESG considerations or factors are or explain why such terminology is an appropriate regulatory standard.
It also imposes a de facto mandate on fiduciaries of retirement plans, requiring them to consider ESG factors that are not supported by DOL’s own regulatory impact analysis (RIA), and the steps needed to comply with the obligation are unclear and ambiguous.
“To the extent that ERISA fiduciaries select investments pursuing collateral ESG objectives, they will open themselves to liability in private rights of action for breach of their fiduciary duties, including the duty of prudence,” they conclude. “Plan fiduciaries selecting ESG strategies should be particularly cautious of investments with higher fees as well as risk factors or disclosures suggesting that climate change or ESG considerations may result in lower returns, higher volatility, reduced diversification, and forgoing potentially profitable investment opportunities.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
