Citing Racial Justice, Senate Dems Push DOL to Withdraw ESG Proposal

A group of Senate Democrats is calling on the Labor Department to withdraw its proposal clarifying the investment duties of ERISA plan fiduciaries in relation to environmental, social and governance (ESG) criteria, saying the proposal would discourage financial advisors from supporting racial justice. 

 

Addressed to Labor Secretary Eugene Scalia, the July 15 letter from 13 senior Democrats, including Sen. Patty Murray (WA), ranking member of the Senate Health, Education, Labor and Pensions (HELP) Committee, Senate Democratic Whip Dick Durbin (D-IL) and several former presidential candidates, expresses “deep concern” with the department’s proposal and urges Scalia to withdraw it. 

The senators emphasize, among other things, that ESG investing can be important in considering practices that can impact a company’s performance like diversity and how it can serve as a tool for long-term change. “We are at pivotal moment in the fight against systemic racism in our country. Yet, while people across the country demand accountability and reach for available tools to fight for racial and economic equity—from advocating for sweeping federal reforms to address systemic racism to taking smaller personal steps like supporting Black-owned businesses—the Department is moving in the opposite direction,” the senators write. 

 

As an example of the lack of diversity, the letter cites a 2018 Fortune analysis which found that women of color held only 4.6% of board seats on Fortune 500 companies and men of color held only 11.5% of board positions, with only four black CEOs in the entire Fortune 500.

 

“When deciding whether to invest in companies, we believe plan sponsors and fiduciaries should be able to consider whether or not companies have established diverse leadership teams, whether they foster inclusive or discriminatory workplaces, and whether they engage in a variety of other practices that may impact a company’s performance,” the letter states.  

 

The senators further contend that the proposed rule would impose a “burdensome process” for including ESG investments in ERISA-governed retirement plans and would “arbitrarily prohibit” the use of ESG funds as a qualified default investment alternative (QDIA) in a DC plan, either as the QDIA itself or as a component of one. 
And following up on a June 26 statement by Sen. Murray, the senators point out that ESG investments often outperform traditional investments and the overall financial markets, including over the past several years. 

 

The DOL’s ESG proposal, released June 23 by the Employee Benefits Security Administration, would make five core additions to the existing regulations by, among other things, codifying the department’s position that ERISA requires plan fiduciaries to select investments based on financial considerations relevant to the risk-adjusted economic value of a particular investment. 

 

The proposal also acknowledges that ESG factors can be pecuniary factors, but only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. And it adds new regulatory text on required investment analysis and documentation requirements in what it characterized as “the rare circumstances when fiduciaries are choosing among truly economically ‘indistinguishable’ investments.”

 

Comment on the proposed regulation must be submitted by July 30, 2020. 

 

In addition to Murray and Durbin, the letter was signed by Sens. Sherrod Brown (D-OH), Kirsten Gillibrand (D-NY), Tim Kaine (D-VA), Elizabeth Warren (D-MA), Bernie Sanders (I-VT), Tammy Baldwin (D-WI), Bob Casey (D-PA), Amy Klobuchar (D-MN), Cory Booker (D-NJ), Dianne Feinstein (D-CA) and Tina Smith (D-MN).