Conservatives argue DOL proposed ESG rule "not consistent with ERISA"

Conservatives are telling the Labor Department that its plan to allow fiduciaries to consider environmental, social and governance (ESG) factors when they select investments and exercise shareholder rights is extremely risky and maybe illegal.

“Allowing pension fund managers to participate in this activist bootstrapping is in direct conflict with the stated goals of ERISA,” Richard Morrison, research fellow at the Competitive Enterprise Institute, wrote in a letter commenting on the Biden Administration proposal.

Conservative opposition to the rule was tiny compared with support for the rule, progressive groups said last week.

But Morrison and others argue that the ESG proposal flies in the face of ERISA requirements.

“Demoting the interests of pension beneficiaries in order to advance climate change policy and offer preferment to labor unions is not consistent with ERISA, and any rule being promulgated under those auspices is therefore illegitimate,” Morrison wrote.

He added that the importance of the retirement incomes is too important to loosen the reins on fiduciaries who have been “successfully disciplined” to follow the law.

The comment period on the proposal closed earlier this month; more than 22,000 comments were filed with the department.

The Biden Administration proposal is a reversal of a Trump Administration regulation that essentially would have kept ESG issues from being considered when investments were made.

An analysis released by supporters of the rule last week contends that 97% of the commenters supported the Biden Administration. The analysis, conducted by Ceres Accelerator for Sustainable Capital Markets, US SIF: The Forum for Sustainable and Responsible Investment, and the Environmental Defense Fund, found that many commenters argued that most asset managers already recognize that climate and other ESG factors belong in their financial analysis.

Morrison has catalogued conservative reactions to the Biden proposal.

Investment decisions that hinge on ESG are subjective and as a result, inexorably political, according to Benjamin Zycher, senior fellow at the American Enterprise Institute. Fiduciaries are required to act only in the interest of plan participants and beneficiaries, he said. ESG investment conflicts with the interests of current and future retirees, he said,

Zycher said that firms that are under pressure to take ESG issues into account are not in a position to do such analysis. As a result, he said, there will be a new market for various proxy advisory firms that meddle into the affairs of retirement plans.

Analysts at the Free Enterprise Project of the National Center for Public Policy Research said that ESG investments come at a high cost with low returns and that such investments advance a political agenda at the expense of pecuniary objectives.

“Both problems result in a potential – in fact, a highly likely – violation of a pension manager’s fiduciary duties,” they wrote.

An economic policy analyst succinctly summed up conservative opposition to the proposed rule.

“The DOL does not have the discretion to substitute its political judgement or that of the White House for that of Congress as expressed very explicitly by statute in ERISA,” said David Burton, senior fellow in economic policy at the Heritage Foundation.