Washington, D.C. — Following an unusually compressed public comment period, today, the U.S. Department of Labor voted to approve the Financial Factors in Selecting Plan Investments rule. This rule dramatically restricts the ability of fiduciaries to consider important environmental, social, and governance (ESG) factors in their investment decisions.
The rule could effectively block ESG-focused investment products from many plans and may also dramatically affect investment opportunities in products that are not identified as ESG. Following the announcement of the rule, Andres Vinelli, vice president of Economic Policy at the Center for American Progress, issued the following statement:
Shareholders have long been clamoring for investments that consider ESG factors. Overwhelming investor demand in this area has created a vibrant market for ESG investments in the United States and globally. This bland-sounding novel rule in fact impedes the development of a healthy marketplace and is, unsurprisingly, widely opposed by investors and institutions that commented on the rule. By creating artificial bureaucratic barriers to ESG considerations, the Labor Department is shortchanging investors and putting U.S.-based asset managers at a competitive disadvantage to those in Europe, where ESG integration is required by law.
The broad reach of this rule is based on a flawed understanding of how ESG factors are considered in investing. Specific ESG products have proven to be safe, well-performing investment vehicles, particularly during economic downturns. In fact, one-quarter of all professionally managed investments in the United States are already tied to ESG factors. Beyond a desire to put money toward socially responsible funds, this volume shows that investors are recognizing that addressing climate change, proper corporate governance, and corporate effects on society are important ways to manage risk. Attacks on integrating ESG into prudent investing are misguided and would, in particular, make it harder to invest retirement savings with an eye toward long-term risks. ESG incorporation has the additional impact of steering capital toward safer, low-carbon investments, which would protect plan holders, financial stability, and the planet. The rule misses an opportunity to advance all three interests simultaneously.
Ultimately, this rule is a solution in search of a problem. The rule is not backed by relevant evidence and in fact only adds extra burdens onto fiduciaries that consider ESG factors—burdens that are notably not imposed on investments in risky fossil fuel firms. The unusual procedural circumstances surrounding this rule-making and the sloppy handling of the substance constitute an inauspicious signal for the marketplace. The Labor Department should rescind this rule immediately.
- “Workers should be able to invest their 401(k)s in companies that won’t harm the climate” by Alexandra Thornton and Colin Medwick, MarketWatch
- “Comments in Response to Proposed Rule on Financial Factors in Selecting Plan Investments (RIN 1210-AB95),” CAP’s comment letter to the U.S. Department of Labor, signed by Andy Green and Alexandra Thornton
For more information or to speak with an expert, contact Julia Cusick at gro.ssergorpnacirema@kcisucj.