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IAs (mostly) pan ESG proposal

Investment advisers have (mostly) panned the Department of Labor's proposed efforts to rein in sustainable investment, sometimes called ESG investing.

Investment advisers have widely panned the Trump Administration’s efforts to rein in sustainable investments.

Under rules proposed by Department of Labor officials June 30, pension managers and advisers wouldn’t be allowed to invest in so-called ethical, sustainable, governance vehicles if the investment would sacrifice investor profits or increase investor risk. That’s a non-starter for investment advisers, IAA Associate General Counsel Sarah Buescher says.

“We’ve heard a lot of concerns from our members about this proposal,” she told sister publication RCW. “The fundamental premise is that ESG under-performs other investments. And we don’t agree with that fundamental premise.”

Disclosure, yes, new rules, no

Proponents of the measure say that ‘ESG’ has become a pop meme that means different things to different people. The definition of “fiduciary,” meanwhile, hasn’t changed, and the proposed rules are necessary to avoid confusion and investor losses, they claim.

Buescher says there are already rules in place requiring IAs to explain their ESG strategies to investors or potential investors.

“We’re certainly in favor of disclosure at that level. To jump to the assumption that ESG under-performs, though, is a big leap,” she says.

IAs speak out

The comment period for Labor’s proposed rule closed July 30. More than 700 comments were posted, and judging by letters from investment advisers, most in the industry are with Buescher.

Among those panning the rulemaking notice was titan BlackRock ($315B in AUM), which said the proposal “creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially material ESG factors, regardless of their potential effect on the return and risk of an investment.”

Some IAs made their feelings clear on the stationary they used. Sage Advisory Services ($12.8 billion AUM) President and Chief Investment Officer Robert Smith, for instance, used letterhead with a green leaf above the slogan “Sage ESG: Invest Well, Do Good” to condemn the proposed rules.

Ceres weighs in

A lengthy letter from Ceres, Inc. Executive Director Mindy Lubber, whose nonprofit group works with institutional investors and companies to build workable ESG models, was endorsed by other investment advisers.

“I urge the Department to withdraw, or in the alternative, substantially modify the proposed rule,” Lubber wrote. “Specifically, I call on The Department to: (1) Acknowledge that ESG issues may in fact pose material short, medium and long term financial impacts and risks; (2) Clarify that when ESG issues present material risks or opportunities, the fiduciary duties under the U.S. Employee Retirement Income Security Act … would compel qualified investment professionals to treat such ESG issues as economic considerations; (3) Retain the ‘tie-breaker’ test, which allows for ESG factors to be considered for non-pecuniary reasons; and (4) Rely upon its existing, protective framework in whether a ESG fund (pecuniary or non-pecuniary) may constitute a QDIA or component of a QDIA.”

Minority report

Not all IAs were critics.

“A stain on the current pension investing landscape is the growing tendency of fund managers to consider in their plan selections non-pecuniary cultural and societal issues,” longtime venture capitalist Wendell Minnick wrote.

Minnick said he was “very pleased to see” Labor officials take up the matter.

“It is worrisome that pension plan fiduciaries, who are entrusted to maximize pensioners’ financial interests, time and again wade into the murky ESG ecosystem during investment plan selection,” he said. Labor’s “efforts to hold pension managers more accountable in this regard should be lauded.”

‘Heavy burden’

Like net neutrality and tort reform, ESG divides fairly cleanly along partisan lines: Democrats tend to be keen on it, Republicans not so much.

But Labor’s rulemaking notice is the first step of its kind to codify ESG regulations on their own, and it’s a blunt instrument, IAA General Counsel Gail Bernstein says.

“It is a big deal because of the disincentives to go in that direction,” she says. “It’s a heavy burden.”