SEC, DOL take different approaches to regulating ESG investing

DOL proposal likely would chill the use of socially responsible investments in retirement accounts; the SEC focuses on disclosure.

As the popularity of socially responsible investing continues to grow rapidly, it has caught the attention of regulators and produced different approaches to oversight.

The Department of Labor recently proposed a rule that would update and clarify investment rules for employer-sponsored retirement plans, such as 401(k) accounts. Under the measure, plan fiduciaries are instructed not to make investment decisions that promote environmental, social and governance goals above achieving the highest return possible for retirement savers.

The comment deadline for the proposal is Thursday, and one of the first letters released publicly asserted the rule could curb ESG investing in retirement accounts.

“Simply stated, the Department’s proposed rule is out of step with the best practices asset managers and financial advisors use to integrate ESG considerations into their investment processes and selections,” several Morningstar Inc. officials wrote in their comment letter. “Were the Department to keep the rule as proposed, it would lead to worse outcomes for plan participants as plan sponsors shied away from assessing ESG risks in selecting investments. ESG risk analysis should be part of any prudent investment analysis—and not called out for special, unique scrutiny.”

On the other side of Capitol Hill, the Securities and Exchange Commission also is setting its regulatory sights on ESG investing. This year for the first time, it has made reviewing how registered investment advisers handle ESG an examination priority.

The SEC “has a particular interest in the accuracy and adequacy of disclosures provided by RIAs offering clients new types or emerging investment strategies, such as strategies focused on sustainable and responsible investing, which incorporate environmental, social, and governance criteria,” the agency said in its exam priorities document.

The SEC is taking a more agnostic approach to ESG, while the DOL is expressing its skepticism, said George Raine, a partner at the law firm Ropes & Gray. The SEC wants to make sure advisers who are touting ESG investing are giving clients what they’re promised.

“There is definitely a fair amount of skepticism on the part of the SEC staff that not all that glitters is green,” Raine said. “They’re holding advisers’ feet to the fire. I wouldn’t be surprised over time to see enforcement cases where investment advisers have been sloppy in connecting their actions to their claims in their public disclosures.”

Fairview Investment Services, which provides back-office compliance help for advisers, said ESG is a trending item in recent SEC exams.

“The SEC is asking advisers whether they have adopted policies and procedures for ESG strategies and whether they disclose that an ESG screen will be applied to investments and how that may impact security selection,” Fairview wrote in an analysis.

The agency realizes ESG evaluations can vary depending on who’s conducting them, said Ellen Harvin, executive vice president at Fairview.

“There is a fiduciary and regulatory expectation of due diligence on data providers for ESG,” Harvin said.

Although the DOL and SEC are coming at ESG a bit differently, their attention to the issue is making advisers take a more careful look at socially responsible investing.

“Everyone needs to step back and understand how ESG considerations constitute a part of the investment process,” Raine said.