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Trump’s ESG Investing Rule Creates Retiree ‘Litigation Roadmap’

Aug. 4, 2020, 8:21 PM

A proposed record-keeping rule for socially conscious retirement investments must go unless plan sponsors want to spend more time in court, benefits advisers told the Labor Department.

The regulation would require plan fiduciaries to fully document their reasoning for investing in environmental, social, and corporate governance (ESG)-focused funds. That change would create a separate standard for evaluating ESG-related funds than other investments, something plan participants could latch onto in cases challenging the financial management of work-sponsored retirement accounts.

“The documentation of ESG considerations creates a possible litigation roadmap,” Aliya Robinson, an ERISA Industry Committee retirement policy adviser, said in a comment letter. Challenges “could be brought for any alternative that is not considered by the fiduciary,” she said.

The Employee Benefits Security Administration maintains the scrutiny on retirement investing is warranted to preserve the financial security of plan participants, as mandated by the Employee Retirement Income Security Act of 1974. But critics questioned the need to single out ESG funds.

“We oppose a heightened regulatory standard for any specific investment category, as the Department’s principles-based standards for ERISA fiduciaries and plan sponsors effectively protects plan participants from financial risk,” Insured Retirement Institute regulatory affairs chief Jason Berkowitz wrote.

Fiduciaries are already obligated under ERISA to protect plan participants’ retirement savings above all, precluding them from jeopardizing lifelong earnings by paying higher fees or accepting lower returns if better options are available. To that end, according to IRI, the proposal is redundant.

The comment period for the White House-ordered guidance project, which President Donald Trump set in motion in April 2019, closed on July 30. EBSA on Tuesday slowly began publishing some of the 1,500-plus letters that poured in.

No Agreement on ESG Value

None of the dozen comment letters collected by Bloomberg Law cited the exact same investment study or ESG-related research, showing lack of consensus on the funds’ values.

Some cited data showing ESG funds outperformed traditional stocks in recent years, while others railed against the higher fees, lower returns, and political considerations that can accompany “activist investing.”

Nearly two dozen Democrats on the House Committee on Education and Labor bashed EBSA for failing to provide a detailed analysis of how excluding ESG from retirement funds would substantially harm or benefit plan participants. House lawmakers criticized regulators for floating “unsubstantiated” arguments that the rule’s “the resulting benefits will be appreciable.”

Their colleagues on the Senate Health, Education, Labor and Pensions Committee detailed similar concerns.

Supporters Applaud Clarity

Robinson thanked regulators for attempting to address conflicting information that’s built up over time, but said EBSA should stop all ESG audits until a final rule is issued.

“The litany of sub-regulatory guidance on fiduciary requirement for plan investments has allowed for differing interpretations of these requirements, leading to confusion and inconsistency,” she wrote.

Meanwhile, Richard Brower, a board member at the nonprofit Institute for Pension Fund Integrity, lauded EBSA officials for “reaffirming the importance of financial considerations, not political considerations” as part of the crackdown.

“As long as asset managers are using ESG to demand higher fees for lesser returns, pension funds will not be safe from irresponsible investing,” Brower wrote.

Members of the National Center for Public Policy Research prodded administration officials to go further, pushing for exhaustive documentation “any time policy based analysis plays any role” in retirement investing.

And if policy-based investments can’t be eradicated, the group urged regulators to balance out progressive priorities like clean energy and corporate responsibility with policies conservatives might favor, such as divesting from Chinese government-backed firms.

To contact the reporter on this story: Warren Rojas in Washington at

To contact the editors responsible for this story: Fawn Johnson at; Alexis Kramer at