Will a DOL Rule Kill Responsible Investing for Pension Plans?

Will a DOL Rule Kill Responsible Investing for Pension Plans?

Gwen Le Berre photo

Gwen Le Berre

Director, Responsible Investing

More about this author

Between the previous and current presidential administrations, pension plans that consider ESG data have taken two steps forward and one step back.

The US Department of Labor (DOL) shook things up in June when it announced a new effort to regulate how plan sponsors should take into account environmental, social, and governance (ESG) data in their investment decisions. The proposed rule aims to “make clear that ERISA plan fiduciaries may not invest in vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives.” In plain language, the proposed rules will require employer-sponsored retirement plans to show that investments that consider ESG are expected to perform at least as well as similar investments that don’t.

You might wonder why this is such big news, since the DOL issued guidance on this topic as recently as 2018. There have indeed been multiple iterations of this idea, but all have been in the form of nonbinding guidance. The message to employer-sponsored retirement plans has been mostly consistent over the years: Don’t put environmental or social goals above investment returns. But depending on the presidential administration, the tone has been different every time. 

The DOL under the Obama administration issued a bulletin in 2015 indicating that a fiduciary should prioritize the financial objectives of the investment. However, this bulletin took a more ESG-friendly tilt by highlighting that “environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment [and are] not merely collateral consideration or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.” In other words, ESG considerations are part of the normal investment decision process and may be necessary to achieve financial objectives. This strongly implied that ESG should therefore be incorporated in the investment decision process—two steps forward for the responsible investing crowd.

In 2018, the overall message that a fiduciary should put the financial objectives of the investment first didn’t change. However, the DOL under the Trump administration appeared to pull back its ESG friendliness by warning fiduciaries in a new bulletin to “not too readily treat ESG factors as economically relevant.” One step back for the responsible investing crowd.

This brings us to today’s dance. What does the proposed new rule really mean, and has anything really changed for employer-sponsored retirement plans? June’s announcement doesn’t change the fundamental truth that the DOL wants fiduciaries to put investment objectives first. However, if finalized, the rule might have an outsized impact on the employer-sponsored retirement landscape because of its very regulatory nature. Until now the DOL used guidance to help clarify its stance. By proposing an actual rule, the DOL is putting more regulatory risk on fiduciaries that choose ESG investments. 

The proposed rule asks for additional documentation of investment analysis when considering ESG investments and explicitly requires fiduciaries to consider other available investments. While fiduciaries have already been doing that, the additional regulatory pressure and documentation burden might put a damper on fiduciaries looking at ESG investments. But that doesn’t mean it should. Let’s not forget that while the proposed rule discourages fiduciaries to blindly pick ESG investments, the DOL also recognizes that ESG considerations may have an impact on an investment’s financial performance.  

Help your clients tailor portfolios to their principles

More to explore

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.