DOL’S ESG proposal would hurt retirement accounts

The Department of Labor lost an opportunity to encourage investors to support causes that they hold close to their hearts with a proposed rule regarding the investment choices they’re allowed in their retirement accounts. It’s a proposal that also could end up damaging Americans’ retirement security long-term if allowed to become part of the Employee Retirement Income Security Act.

The June 23 proposal reaffirmed standard thoughts on fiduciary responsibilities that suggest only financial risk and returns can be considered when managing employer-provided retirement plans. In a release, the DOL specifies that its motivation was to “provide clear regulatory guideposts” for plan fiduciaries given the increasing popularity of environmental, social and governance investing.

The proposal, which has been released for comment through July 30, makes clear that “non-pecuniary goals” that might relate to political or public policy shouldn’t guide investments of pension funds. Previously, agency guidance has allowed ESG benefits to count in tie-breaker situations when investment performance is the same as non-ESG funds that fiduciaries are also considering.


The trouble is that ESG products, which are designed to assess environment-related risks and opportunities, increasingly have been shown to weed out unforeseen financial dangers and, thus, perform better in the long term. A study for the U.N. Principles for Responsible Investment in 2019 found ESG-focused portfolios outperformed the MSCI Index over 10 years and an IMF analysis determined there was no evidence of underperforming.

Vikram Gandhi, the Harvard Business School professor who created the institution’s first course on sustainable investing, said the Labor Department proposal fails to account for evidence that long term investors like retirees are likely to earn better returns from investments that account for ESG criteria.

Asked about the impact of this proposed rule, Gandhi told InvestmentNews’ publication ESG Clarity US on July 16 that fiduciary obligations are very important and should not be compromised. “I would argue that by not incorporating ESG into the analysis, trustees will not be fulfilling their fiduciary obligations.”

Thirteen Senate Democrats also weighed in with a letter to Labor Secretary Eugene Scalia on July 15 that said proposed restrictions on ESG investments “would discourage financial advisers from supporting racial justice” and pointed out that ESG investing results have shown “investors can both achieve strong returns while driving positive change.”

The agency could have taken a useful step by clearly defining ESG in its proposal because the term is sometimes used interchangeably with descriptions like “socially responsible investing,” or “ethical investing,” which do include non-financial beliefs into investment choices, such as excluding gun manufacturers.

Instead, the Trump administration took a much harder line, clearly aimed against ESG investing in retirement accounts. That suggests the “political” motive that the proposal says shouldn’t guide pension investments is what’s really behind the introduction of this public policy proposal, which can be seen as a move to support the U.S. fossil fuel industry at a time when it’s being hammered by the COVID-19 pandemic.

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