This push and pull is yet to be resolved. However, advisors may want to consider discussing with counsel how best to prepare for the various alternative outcomes and what to do if state and federal laws conflict.
We’ve mentioned a potential new rule from the Department of Labor (DOL) on changes to how they view Environment Social and Governance (ESG) based investing funds. In fact, we’ve been monitoring ESG funds and their performance since 2017. The volume of investments in ESG funds is one part of why we focus on this trend. “In 2017, there were an estimated $8.72 trillion in assets under management with sustainable directives, up significantly from $6.57 trillion in 2014. In 2018 that number swelled to $12 trillion, with Forbes reporting that that amount accounts for 1 in every 4 dollars of total assets under management in the United States.”[1] It’s not all organic roses and smog-free sunshine: “Inaccurate statements could be driving the inclusion of some companies into [ESG] funds improperly. Conservative leaning policy groups… also petitioned the SEC to ensure that the true costs of environmental stewardship be revealed to investors. Their theory is that these environmental costs deplete assets that belong to shareholders.”[2] While federal legislators stalled on defining ESG and making investing rules concerning it, states like Delaware began making their own rules.[3] Which created a tense as well as confusing arena for ESG funds.
And now, in Spring of 2023, the push and pull over ESG has hit max level. In this article, we’ll review the responses, including pending court cases about the DOL’s rule. However, advisors (and all readers of this article) who read this after Spring of 2023 should keep in mind that there could be changes to the status of the rule. We expect to keep an eye on these developments and update our readers in future newsletters and online.
As we’ve discussed, the SEC took aim at defining ESG. “The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue.” The SEC’s proposed rules (which could take some time to become final) relies on the Names Rule to require that a funds with a stated intention in their name (like a climate fund, or a green fund) must have 80% of their assets in investments that align with the name. The proposed rules will also make obtaining those ESG-related disclosures easier.”[4]
The DOL’s rule would allow plan fiduciaries to consider ESG.[5] The rule removed parts of a previous recommendation against recommending ESG-focused investing enacted by President Trump’s administration. The previous rule said plan fiduciaries should focus on pecuniary factors alone.
Some commentators thought the DOL’s rule was less controversial than originally stated. “The DOL's final rule is seen as more neutral than previously proposed…. That's because, unlike the October 2021 proposal, it does not include examples of specific ESG factors that fiduciaries could consider. It also removed language that said a prudent fiduciary process "may often require" the consideration of ESG factors.”[6]
The response to the DOL’s rule came early and hard in Winter of 2023. First there was a lawsuit by several State’s Attorneys General in state and federal courts to rebuke the DOL investing rule. The states, through their Attorneys General, argue that the new rule conflicts with ERISA’s requirement that fiduciaries prioritize financial benefits of investments ahead of other concerns. The status of those lawsuits is still influx but has not stayed the implementation of the DOL’s rule.[7] The next act was a resolution by Congress overturning the DOL’s rule, which was vetoed by the President.[8] Additionally, several states legislatures, including Utah, South Carolina, Indiana, and Virginia, are considering bills restricting the investment advisors and fiduciaries of state from considering ESG factors in their portfolios. On the flip side, other states, including New York, Oregon, Washington, Massachusetts, and Connecticut, are considering bills allowing public funds to not only consider ESG factors but also contemplate divesting from industries that fail ESG analysis.[9]
This push and pull has yet to be fully resolved. However, advisors may want to consider discussing with counsel how best to prepare for the various alternative outcomes and what to do if state and federal laws conflict.
[1] https://www.bcgbenefits.com/blog/socially-responsible-investing
In 2021, we noted that ESG fund performance in general dipped during the pandemic but remained strong. See https://www.bcgbenefits.com/blog/corporate-social-responsibility
[2] https://www.bcgbenefits.com/blog/greenwashing-investment
[3] https://www.bcgbenefits.com/blog/state-and-local-legislation
[4] https://www.bcgbenefits.com/blog/esg-institutional-investors-and-secs-greenwashing-rule
[5] The DOL’s announcement of the rule can be found here https://www.dol.gov/newsroom/releases/ebsa/ebsa20221122
[7] https://rollcall.com/2023/02/02/gop-attorneys-general-sue-labor-department-over-esg-rule. Additional information on the DOL’s response to the lawsuits can be found here: https://www.asppa.org/news/dol-pushes-back-motion-halt-esg-reg; https://www.lw.com/admin/upload/SiteAttachments/Alert%203058.pdf; and https://www.ropesgray.com/en/newsroom/alerts/2023/02/dols-esg-rule-attacked-on-multiple-fronts
[8] https://www.plansponsor.com/senate-follows-house-in-rejecting-dol-esg-retirement-rule
[9] https://rollcall.com/2023/02/02/gop-attorneys-general-sue-labor-department-over-esg-rule
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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