Last month, on August 31, 2020 the U.S. Department of Labor (DOL) released the Notice of Proposed Rulemaking on Fiduciary Duties Regarding Proxy Voting and Shareholder Rights under the Employee Retirement Income Security Act of 1974 (ERISA). This proposal addresses the application of ERISA’s fiduciary duties of prudence and loyalty to the exercise of shareholder rights, which includes proxy voting, proxy voting polices and guidelines, and the selection and monitoring of proxy advisory firms.1
This proposal comes just weeks after another proposed change to ERISA retirement plans – Notice of Proposed Rulemaking on Financial Factors in Selecting Plan Investments Amending “Investment duties” Regulation at 29 CFR 2550.404a-1. On June 23rd, the DOL released this new proposal to amend investment duties regulations that would limit ESG investing. Per the DOL, “The proposal is designed, in part, to make clear that ERISA plan fiduciaries may not invest in ESG 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”.2
There has been a long history of the DOL trying to restrict ESG investing, but unlike past eras, this time there was a lot of support for ESG investing coming from mainstream firms. During its short 30-day comment period, over 1,500 comment letters from concerned firms, trade groups, organizations, and individuals were submitted to the DOL on the proposed rule. T. Rowe Price, Morningstar, and USSIF are among some of the organizations that submitted formal letters to the DOL opposing the Proposal. We have included below some of their comments:
- Morningstar: “Simply stated, the Department’s proposed rule is out of step with the best practices asset managers and financial advisors use to integrate ESG considerations into their investment processes and selections. Were the Department to keep the rule as proposed, it would lead to worse outcomes for plan participants as plan sponsors shied away from assessing ESG risks in selecting investments.” 3
- USSIF: “The DOL proposal is out of step with professional investment managers who increasingly analyze ESG factors precisely because of long-term risk, return, and fiduciary considerations. Investor interest in companies’ ESG practices has never been higher. Since 1995, when the US SIF Foundation first measured the size of the US sustainable investment universe at $639 billion, these assets have increased more than 18-fold to $12 trillion in 2018, a compound annual growth rate of 13.6 percent.” 4
CCM’s core fixed strategy is comprised of high credit quality and other fundamental characteristics that would render the proposed rulemaking unlikely to apply to our firm. However, as a pioneer in impact and ESG investing for over 20 years, and as a member of USSIF and other impact and ESG organizations, we are discouraged and frustrated by the DOL’s proposals. We are strong advocates and supporters of impact and ESG investing and agree with the commentators that this latest proposal will put a substantial additional burden on fiduciaries who wish to utilize ESG investments by requiring further investment analysis and documentation requirements. Many have requested for an extended comment period, while others have directly requested a withdrawal. The DOL could also issue a request for information, proceed with the rule – which means it would be effective after 60 days of the final publication in the Federal Register, or release a new revised rule.5
CCM will continue to monitor closely the developments of the proposed rules on ERISA retirement plans and ESG considerations.