In June 2020, the U.S. Department of Labor (DOL) released a proposed rulemaking, “Financial Factors in Selecting Plan Investments,” to revise the fiduciary standard for Employee Retirement Income Security Act (ERISA)-governed retirement plans. The proposed rule would establish that retirement plan fiduciaries can only cite pecuniary reasons for choosing to include Environmental, Social and Governance (ESG) funds on their plan menus, appearing to discourage the inclusion of funds embracing ESG risk factors in investment processes.
In 2015, the DOL issued an interpretive bulletin clarifying that fiduciaries of ERISA-governed pension plans need not treat reasonably selected investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social or other such factors. A formal rule, such as what the DOL is currently proposing, is much more permanent and difficult to undo than guidance.
Led by social investor groups such as US SIF: The Forum for Sustainable and Responsible Investment, Interfaith Center on Corporate Responsibility (ICCR), Ceres, the Council of Institutional Investors (CII) and Intentional Endowments Network (IEN), thousands of investors, product providers and plan sponsors across the country have challenged the DOL’s proposed rulemaking. Arguing that the DOL proposal is out of step with professional investment managers, who increasingly analyze ESG factors precisely because of risk, return and fiduciary considerations, the rule would put a substantial additional burden on fiduciaries.
Interest in sustainable and impact investing has skyrocketed in the past decade. According to the US SIF Foundation, as of 2018, total U.S.-domiciled assets under management (AUM) using sustainable investment strategies grew from $8.7 trillion at the start of 2016 to $12.0 trillion at the start of 2018, a 38 percent increase. In terms of performance, numerous studies have concluded that there need not be a performance cost to employing a sustainable investment approach. Furthermore, data from MSCI, a leading provider of decision support tools and services for the global investment community, and other sources show that companies with strong ESG characteristics sustained lower declines in relative terms during the market collapse in March 2020.
In July, Praxis Mutual Funds® submitted a comment letter to the DOL, highlighting its commitment to providing competitive, financially sound investment products to individuals and institutions seeking to provide for their future in a manner that reflects their faith and values. For over 25 years, Praxis has offered investment vehicles that successfully integrate social screens and an increasingly sophisticated understanding of environmental, social, and governance risk data. These processes have been prudent, fact-based, and mindful of the fiduciary responsibility to Praxis clients. Furthermore, the letter argues that the DOL has failed to articulate a connection between relevant facts about the use of ESG factors by investment managers and the proposed rule. The proposal reveals a fundamental misunderstanding of how professional investment managers currently use ESG criteria as an additional level of due diligence and analysis in the portfolio construction process.
Said Chad Horning, Praxis Mutual Funds President and Everence Financial® Senior Vice President, “We felt a sense of urgency in responding to the DOL’s proposed rulemaking, not only as a provider of proven ESG financial products, but on behalf of the 350 employees of Praxis/Everence Financial and the more than 30,000 Praxis Funds investors, who invest as an important expression of who they are and the religious values they hold. ESG factors can be, and have been, integrated into the investment process not only consistent with existing guidance and fiduciary understandings but in ways that can enhance those efforts.”
Said Mark Regier, Vice President of Stewardship Investing for Praxis Mutual Funds and Everence Financial®, “This proposed rulemaking poses a special threat to faith-based and values-driven investors who have benefited from the growing array of competitive, high-quality funds that integrate ESG factors. For many, retirement savings plans represent an individual’s only invested assets and therefore the only opportunity to have their values reflected in this way.”