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Date: 2021-06-11 12:56:15
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Roughly a year ago, the Labor Department issued a proposed new rule on “Financial Factors in Selecting Plan Investments”—but that, as they say, was then. This week, we asked readers if their—and their plan sponsor clients’ perspective(s) had changed.
Starting with that proposal by the Trump administration, we asked what readers thought about it. A year ago, 46% of the respondents said that it “makes sense to me.” Just 18% felt that the Labor Department was “way off base,” while 27% “haven’t decided” how they feel about it—and the rest hadn’t yet read it. Not quite a year later—well, fewer thought they were off base, and more hadn’t decided. But a strong (and almost identical) plurality still thought it “made sense”:
46% - Makes sense to me.
28% - They’re way off base.
21% - Haven’t decided how I feel about it.
5% - (Still) Haven’t read it.
And—even though in many ways, it seems like a lifetime ago, we got a number of reader comments—and they reflected the diversity of the responses.
I think the way that performance is measured is important and since it’s challenging to measure that in ESG, there should be some hurdles for it to get over before it’s widely accepted and pushed.
It doesn’t prohibit ESG from being considered as a pecuniary factor. Only basing pecuniary factors makes not just sense, but seems like common sense.
While I appreciate that “financial considerations” need to be top of mind for investment committees, I also think it is relevant that companies be allowed to choose investments that align with their corporate values.
The pecuniary factors interpretation was how a lot of us understood it to begin with. What changed was as ESG considerations (in some form) shifted more to the norm, that administration signaled it would be going after plans who make explicit their consideration of ESG factors – both discouraging their explicit use (against the tide) and signaling it as an enforcement priority. So what will plans do? The same thing, but with consideration of ESG as contributors to performance and minimization of risk (read: “pecuniary factors”) rather than an express ESG mandate. The ones who were reluctant to begin with probably won’t pursue ESG funds or ESG considerations of non-ESG funds. It seems to me this rule was a lot of bluster for nothing.
Frankly, I would go even further than the Trump administration. I would bar ESG choices from being offered to DC plans. Academic research shows that ESG stocks have lower expected rates of return. It’s a violation of plan sponsors Fiduciary Obligations to offer investments with lower expected returns.
Fake news about fake issues = fake profits= non-sustainable
Values-based investing should only be one of the filters used. There should still be a pecuniary reason for using the investment.
The main fiduciary responsibility of a plan admin is to provide the best possible return for participants – all other considerations are secondary.
In my opinion, much to do about nothing really. Same as it ever was...
Until ESG funds become less about optics and subjective factors for inclusion it’s a waste of time and energy.
To a large degree, I think it makes sense. But I question that it was promulgated for all the wrong reasons. I think you can (and should) take other factors into consideration – so long as you can clearly define them.
Especially considering the global climate (Europe especially), and the fact that good behavior can be very profitable, it makes no sense to limit.
ESG is a cancer. I no more want my investments selected based upon the sexual orientation of the board members than I would a heart surgeon about to operate on a loved one.
Pecuniary factors are very important, but shouldn’t be the sole criteria. Plan sponsors should have the freedom to offer a fund line-up that aligns with their employee demographic and values.
I don’t think that ESG needs special rules. We can put these funds through normal screening processes to ensure that they are well-managed and performing competitively. You don’t need to give up anything to have ESG.
The end goal of a DC plan is to help participants build a retirement nest egg. Remember that whole three-legged stool thing? It is not to make people feel good about their investments. If a fund cannot deliver a reasonable rate of return, then it does not belong in a qualified retirement plan, regardless of who is electing the available investments.
An ESG option should be able to stand on its own against other funds in its category universe. Assuming ESG firms perform well financially, they will score well. Favoring a specific class of funds for ESG purposes is not always in the best interest of the participant especially when the definition is “fluid” as you mention.
The DOL’s encouragement in this area was misguided. Fiduciaries must concentrate on risk/return rather than social good.
My view is pecuniary factors are the right play when it comes to operating as a fiduciary. Injecting other factors, especially those not fully defined, can lead to misuse and less favorable outcomes for plan participants.
It’s never been a big part of our approach, and there isn’t a lot of demand for it outside of our not-for-profit clients.
Any social elements that are expected to gain momentum in the marketplace over time would, in my opinion, be reasonably considered a pecuniary factor. The DOL did not ban ESG, just disallowed the use of non-pecuniary factors to drive investment decisions.
With over 60 plan sponsor clients, I kid you not when I say that I have yet to hear a committee, as a whole express any interest in ESG options whatsoever. Our smallest plan has 18 participants, and our largest plan has approximately 4200 participants, and the committees we work with don’t seem to care about this issue one way or another. The Investment Policy Statement as it is presently written, coupled with a CEFEX certified review process leveraging Fi360’s Fiduciary Focus toolkit, is what our clients are comfortable with and accustomed to.
I like that business owners/fiduciaries have an opportunity to create a plan that is in line with the company’s mission, vision, values – but I see where some fiduciaries may take a personal interest in including investments that fit their agenda.
I understand their take, even if I disagree to some extent with it. Frankly I’m a little ambivalent about it, just give us the rules instead of politicizing it.
Studies show that investments with an ESG bias can actually perform better than those with no ESG bias and have less volatility.
The Trump rule was a ham-fisted regulation that doesn’t work. While I am neutral regarding ESG (I’ll use it when it screens well for a plan, just like any other option), the Trump people were starting down a dangerous road of having the government dictate winners and losers instead of the market.
Biden Executive Order Response
But then, a lot has changed since the Labor Department’s proposed rule; a final rule that seemed to walk back (some) the harsh rhetoric in the preamble to the proposed rule, a new Administration that first froze enforcement, and then just last month issued an Executive Order that directed the Secretary of Labor to reconsider rules that that would have barred consideration of ESG factors. All this at a time when retail trends suggest growing interest in the option.
So, we asked readers what they thought of President Biden’s recent Executive Order directing the Secretary of Labor to reconsider rules that would have barred consideration of ESG factors in investment decisions—and, perhaps oddly, the responses to a very different approach—well, were pretty similar:
42% - Makes sense to me.
26% - They’re way off base.
25% - Haven’t decided how I feel about it.
7% - (Still) Haven’t read it.
I think the way that performance is measured is important and since it’s challenging to measure that in ESG, there should be some hurdles for it to get over before it’s widely accepted and pushed.
Nothing they do makes any sense. Why would this?
Pecuniary factors should remain the sole criterion for fiduciary consideration on behalf of qualified plan assets. Adding ESG or other variables is too subjective.
All of this feels like politicking, rather than having a real impact on retirement savings.
Still not clear on how to compare and evaluate ESG funds beyond performance. How does one gauge whether a fund is more ESG sensitive than another?
ESG investments should be barred from DC plans. ESG investments have lower expected returns.
Put ESG in a qual plan if they want it, if not move along!
Some US based fund companies are putting ESG filters on all funds in the family. To have any restriction, real or perceived, would be cumbersome in the future.
Plan Sponsors need clear guidance.
I don’t care if a fund takes into account ESG factors. Does it deliver the return I want, yes or no? If there are true ESG concerns, the free market will address those factors in due time.
To me, that move is just political and has nothing to do with the merits. Whatever is decided will be considered a Biden administration decision.
There was not choice for “off base a little.” I feel that there are lots of options where, whiting the correct risk/return parameters, there is room for secondary objectives such as ESG.
I think it’s fine to reconsider regulatory rules. The basic fiduciary duties of loyalty and prudence still prevail.
I’ve been in this business for over 25 years, and in my humble opinion this topic falls right into the same arena with the Fiduciary Standard vs. Best Interest topic and countless others. Lawyers and Legislatures beat the dead horse day in and day out for what seems like eternity, and the average consumer on the street doesn’t give a sh..... And believe it or not I don’t consider myself to be a cynical person.
If the rule is banned, you could have an environmental conservation company that is forced to include investments that directly contradicts its core values and purpose. Does not seem ideal.
I can see from both sides but I personally have no issues investing in ‘sin’ stocks.
The existing rule makes a lot of sense. Biden administration clearly is more interested in doing something different that Trump and consideration for participants is secondary to political motivation.
The Biden administration appears to be heading just as far in the other direction—the government should set a neutral playing field and let plans and advisors decide whether ESG makes sense.
Participants should have the option to invest in things they believe in as long as those investments add value to their portfolios.
Yup, since the rule shouldn’t have existed in the first place.
Not sure I agree with the question since nothing has/is barred/barring fiduciaries from considering ESG factors. In other words, if the fiduciary felt that certain ESG factors enhanced investment returns, then they would have no problem proving that in a court of law.
There is a lot of talk today about “inclusion.” If the Democrats “include” ESG, they better “consider” and “include” everything else in it. Should every investing factor be included, then I would agree with it.
ESG Suitability Perspectives
Administration perspectives notwithstanding, we then asked what readers thought about the suitability of ESG options on a defined contribution/401(k) plan menu:
46% - I think it makes sense as a consideration, but not a controlling consideration.
24% - I’ve got my doubts.
17% - I’m open to the idea, but not really committed.
13% - I’m completely on board!
But then—perhaps persuaded (or not) by the events of the last year, we asked readers if their sense of ESG suitability had changed during the past year—and, for the very most part, no minds ere changed:.
47% - No, was skeptical then, and nothing’s happened to change my mind.
35% - No, liked it then, and still do.
15% - Yes, was skeptical then, but I’ve now warmed to the idea.
3% - Yes, liked it then, but now I’m not so sure.
ESG funds have gone from a niche to mainstream, but that change has occurred over more than just the past year. These days, the composition of a lot of supposed “conscious” or “responsible” funds isn’t all that different from their non-ESG (“unconscious”? or “irresponsible”?) counterparts. I think the biggest change is it’s leading fund managers to grill large companies more on what they’re doing – board composition, discrimination practices, carbon footprint, etc. And I don’t really see that as a bad thing. That said, I think the mere presence of a fund labeled “ESG” (or some variation) will encourage savings among some who might otherwise be reluctant to get involved with investing, and that’s probably a good thing too. (I do question whether those participants getting what they thought they were getting. In that regard, it’d be nice to have some “super-conscious” (or whatever descriptor) funds that really do invest only in social good by a stricter rubric. But I would propose those be offered only through a brokerage window, not a plan core lineup, as I don’t think they could meet the pecuniary factors rule, nor should they be designed to if their primary mandate is social good. They still need good fund managers going their job on them, though.)
No, It’s a violation of Fiduciary obligations under ERISA to offer ESG Investments. ESG Investments offer lower expected returns than other equities with the same level of risk.
I’ve been concerned with some of the investment management companies and where they’ve taken ESG. Some of it seems smoke in mirrors. I understand the energy behind it but am cautiously moving forward with integration with my clients. I’m educating committees and asking for their feedback and only 1 CEO has indicated an interest.
We offer to include it but also explain its mostly optics and done so people feel good rather than it actually doing any good.
If anything, I am even more against the concept of voting “other people’s” proxies based upon your own political beliefs. A fiduciary has a duty to make the best investments possible for its investors/pension participants.
I have never believed there is a single perfect plan design. Behavioral finance teaches us that investors are people and their behavior is a factor in plan design.
Don’t get me wrong, lots of plans don’t offer ESG and they’re doing just fine, thanks. But ESG options are popular with our non-profit clients and those with a younger more astute population so it’s a conversation we’ll continue to have with some plan sponsors.
Liked it only if the fund scored well in our due diligence process.
The worry is, unless codified, the next administration can open up a can of worms and plan sponsors will be liable.
Not sure I’m skeptical, it’s just a non-issue from our clients.
I think it will always be a challenge to defend an investment made based on non-pecuniary factors, if the investment turns out to materially underperform. On the other hand, I don’t mind ESG investments as long as they hold up to standard pecuniary evaluation metrics.
If an ESG option meets our Fi360 scoring and Investment Policy Statement criteria, we will consider it.
Nothing’s changed for me. But as stated, I’m mainly ambivalent, client considerations are what’s most important.
We really feel it is a plan sponsor’s decision to determine whether or not they want to consider ESG investments/approach.
To the extent performance matters, integrated ESG options are doing well.
I think there is more risk in investing in stocks that have issues with polluting, and lack of diversity in the workforce and on corporate boards.
We’ve had ESG in 403(b) plans for decades without issues.
A fiduciaries’ personal views of the environment (read-climate change) and what our society should look like (read-social justice) with regards to making investment decisions I don’t think will end well.
Actively Recommending ESG?
Asked if they are currently actively recommending ESG options to their plan sponsor clients…and while mostly not (yet)…
27% - No.
26% - Only when asked about it.
20% - To some, in selected circumstances.
17% - Yes.
10% - Not yet.
And has that changed in the past year…
46% - No change - I mention it when appropriate, but don’t really push/promote.
40% - No change - I’ve never really pushed/promoted ESG.
8% - No change - I’m still pushing/promoting ESG.
4% - I’m now actively pushing/promoting ESG.
2% - I’ve quit pushing/promoting ESG.
I’m providing fiduciary education on ESG to my Investment Committees and providing regulatory updates. I’m also sharing with their vendors and largest investment managers are doing in the area around ESG. Quite frankly, some of my publicly traded companies are providing interesting insight on the back end. I am opening the discussion to the Investment Committee if they want to explore or evaluate ESG in the lineup. Only 1 CEO has been interested so far.
I suggest it, discuss and move on.
We explain it... look at the holdings of funds and most come to the same conclusion that is generally optics. There are a handful of funds that seem more than just optics but it’s but enough to support an industry shift.
We are consultants and our job is to educate clients about ESG.... and what it really means. Like so much in our business, terms get thrown around, fads are created, people want to sell stuff... we are presenting to clients what this is all about... exactly what ESG is (definitely no agreement on that) and if they are going to move forward, exactly what kind of ESG are they looking to offer? Climate-focused? Investments that won’t buy within certain sectors/industries... and if so, what are those industries? It’s not just guns and tobacco! And let’s all agree that we don’t all agree on what is “socially responsible.” Does everyone in the plan agree guns or contraceptives are “bad”.. or are they “good.” Our clients are ERISA fiduciaries who need to make decisions to help lots of people in their company... and to prepare for retirement. Not to champion causes.
With the no enforcement letter, I started actively telling all Investment Committees to at least have a procedure/policy to address.
ESG is evil cloaked in sheep’s wool.
Committee by committee
Once clarification on ESG factors is determined, will most likely incorporate to a greater degree. There has not been much demand at this time due to the uncertainty.
Our investment policy statements still need to be updated with ESG language and Merrill hasn’t updated it yet. I am discussing ESG as a philosophy to all my plan committees with the goal of when we have more guidance and an updated IPS, I will recommend.
The demand is there and there are ESG investment that perform quite well.
We have been discussing ESG investing for more than two decades; socially responsible investing is not new!
A fiduciary should not recommend certain investment factors over others. It is prudent for a fiduciary or advisor to present the facts and recommend what is in the best interest of all plan participants.
Are plan sponsors/prospects proactively asking about ESG options?
52% - Some are, most aren’t.
37% - No.
6% - Asking, yes. Acting is another matter.
5% - Yes.
And have those requests picked up over the past year?
64% - No, never much interest.
25% - Yes, interest was there before, but it’s accelerating.
8% - No, interest has always been strong, but adoption not so much.
2% - Yes, interest has cooled.
1% - No, interest has always been strong.
Requests notwithstanding, we asked if plan sponsor clients/prospects are acting on implementing ESG options?
47% - No.
32% - Some are, most aren’t.
12% - Mostly they seem to be “window shopping.”
6% - Many are, but not all.
3% - Yes.
And—as for participant response to the ESG option(s):
44% - Don’t have ESG in any of the plan(s) with which I work.
29% - Tepid at best.
21% - Modest, but enthusiastic.
6% - Very positive.
There were tons of comments on this topic this week—here’s a sampling:
It makes sense to recognize those factors into the overall investment process. I don’t think adding an ESG labeled fund to a menu with low utilization does very much.
Portfolio managers are incorporating ESG into their investment process more and more. I think we should be talking more about this and not necessarily isolating ESG funds. Companies (boards and leadership) are recognizing how important it is to have a plan for all aspects of ESG ( especially most recently, DE&I). The regulatory developments including proposed Nasdaq listing rules mandate diversity on boards are driving some of this change. I recently chaired a leadership symposium program where we discussed these issues including what steps portfolio managers are taking to measure ESG and hold companies accountable.
ESG options should be part of plan offerings. Biden’s proposal to have DOL reconsider the appropriateness of using ESG is probably the only thing he will ever due that I could agree with.
ESG is promoted by a small minority of patrons who are mistaking activity for accomplishment. Interest will diminish as the wasted effort is exposed for what it is, meaningless.
I think there’s a lot more both administrations should have been focusing on as far as enhancing retirement readiness and financial well-being in general, and this was an epic waste of time and resources. The current administration undoing an ill-advised rule probably makes sense.
ESG investments are a violation of ERISA Fiduciary obligations since they have lower expected returns with the same risk level as non-ESG equities. ESG investments should be barred from all DC plans.
ESG seems to me to be a sales tactic to make people feel good thinking they are investing in “good” companies. But what is a good company ? What is a bad company? Different people come from different perspectives and I don’t believe ESG is a one size fits all solution. Most companies are doing some positive ESG things and some bad ESG things.
ESG is one option there’s way too much being talked about the subject.
Sick of hearing about ESG... it’s like the investment world equivalent to dining with a vegan.
ESG is another way for managers to sell funds. It is a pitch. If a company wants to be profitable in the future, it will be hard to do so without some level of positive corporate governance, as well as social and environmental cooperation. If a company isn’t profitable, a fund manager won’t invest in it, regardless of its mandates. In addition, if a participant wants to be passionate with their money, they should do so in their daily lives/shopping. That will have a much greater impact and, if enough others feel the same way, then the company won’t be profitable and won’t find its way into a mutual fund. My point is, the premise of ESG is certainly a positive one that many of us want to support. Of course there is interest from participants, as many of us want to “do good.” But that can happen in our daily lives with the normal actions we take or decisions we make. Trying to apply that, in a non-standardized way, and selling in to DC plans is not the way, in my opinion.
As an individual investor, I use ESG products and look for a continued evolution. Part of the issue today – in a DC context, less so in DB – is what ESG actually means. I take issue with lots of the screens and companies that still pass the screens. Certain tech companies might do well on corporate governance, but are terrible at social responsibility. A notable bank that was caught up in fraudulently opening accounts for customers similarly passed many screens over the last several years. It’s hard to align what definition to use and what funds satisfy it. Over time, I think the market will reward most “ESG” activity on its own. See ExxonMobile’s “demotion” in the last decade.
Again, ESG is nothing more than corporate busing or affirmative action with “other peoples’ money”!
Only if their scores put them on our Blue Ribbon list, which means the need 5 year track record in 5 out of 12 categories. Then and only then we would consider a discussion with the committee.
If a fund can be measured using the same criteria of other “normal” funds, then it may be eligible to be evaluated using the same criteria as other funds under consideration for the plan. However, if the end goal of any fund is not to make money or preserve capital for its investors, then it really doesn’t have a place in a retirement plan.
Get the politics out of ESG fiduciary decision-making and come up with a workable solution.
I think we can’t just look at ESG by itself, I believe both quantitative and non-pecuniary factors need to be considered. Also the plan demographics plays a factor.
How most administrations develop their opinions on topics like these are typically dependent on how their campaigns/parties are financially supported. Sad reality of our world.
Anything that detracts from the basic principles of prudence and loyalty in my opinion are inadvisable. Different people will have diverse opinions about what is considered socially responsible. If a plan fiduciary chooses to narrowly define what is socially responsible on behalf of all participants, they are not respecting the diversity of social values amongst participants.
I’m not opposed to ESG, quite candidly I believe in the initiatives and philosophies surrounding ESG investments. I’m just not seeing this emerge as a passionate, top of mind issue/objective for my typical small and mid-sized business client.
ESG is nice, but as a tool for social engineering it has no place; the Trump administration was correct in limiting the consideration of the factors to purely pecuniary motivations for fiduciaries.
Very simple issue for me; ESG funds need to satisfy the screens in your IPS, just like any other fund. I’ve never seen an ESG section of an IPS for that reason.
Thanks to everyone who participated in this week’s NAPA-Net Reader Poll—and have a GREAT weekend, folks!