The U.S. DOL sent enforcement letters to RIA with chilling questions to intimidate those who use sustainable investments

11 Aug, 2020 04:00
source: Singularity Financial

Singularity Financial Hong Kong August 11, 2020 – The U.S. Department of Labor has sent enforcement letters to registered investment advisors giving them two-weeks to answer questions about their use of environmental, sustainable and governance (ESG) funds in retirement plans over a five-year period—a move critics say is designed to intimidate those who use sustainable investments.

DOL’s proposal to force RIAs and plans to limit their ESG investments— to curb environmental, social and governance investments in ERISA plans has drawn sharp criticism from the retirement community.

The letter, obtained by local media, was sent by the Employee Benefits Security Administration (EBSA) and asks RIAs to return five years of detailed information and data regarding their justification for using ESG funds.

“ERISA mandates that plan fiduciaries discharge their duties ‘solely in the interest’ and ‘for the exclusive purpose’ of providing benefits to participants and their beneficiaries,” EBSA New York Regional Director Thomas Licetti said.

The EBSA enforcement letter sent to RIAs requests every investment and fiduciary policy, procedure, minutes of meetings, communications, performance data and audit, and even names of addresses of anyone who had input on firms’ ESG investment decisions.

“This is a move that is clearly designed to intimidate and if it’s followed up by enforcement it will have a chilling effect on fiduciaries’ willingness to consider ESG funds in retirement plans,” said Bryan McGannon, director of policy and programs at US SIF, the Forum for Sustainable and Responsible Investment, a trade group whose members manage some $3 trillion in ESG-related investments.

“Giving firms just two weeks to provide five years of data on the decision-making process they use to select ESG funds, right down to the names and addresses of every person involved, will present real challenges for fiduciaries because there will be this new level of scrutiny and oversight,” added McGannon, who said it is a clear departure for the DOL, which has maintained a hands-of approach to dictating investment selection historically.

The EBSA letter clearly singles out ESG for concern.

“Based on information available to EBSA, it appears that the plan has ESG-themed funds in its investment options. Accordingly, the Department seeks to better understand the Plan fiduciaries’ selection of ESG funds for inclusion in the plan’s investment options and compliance with their duty to administer the Plan prudentally and solely for the purpose of providing benefits to participants and beneficiaries, and defraying reasonable expenses of administering the plan,” Licetti said in the letter.

RIAs were given just two weeks to provide EBSA with the answers and data in the expansive 13-part request, which asks for, among other information, the following:

• Investment policies and guidelines currently in effect for the plan governing the use of ESG factors in selecting and monitoring investment funds for inclusion in the plan’s fund lineup.
• Names, addresses and responsibilities of all persons or entities with responsibility for making investment decisions or providing investment advisory or consulting services that take into account ESG factors in connection with plan investments.
• Documents reflecting calculations or disclosures of gains or losses on the plan’s ESG investments.
• Reports and summaries for investment performance and returns.
• Financial statements and audits on ESG investments.
• Disclosures, communications and documents describing the operation, investment risks, management and performance of each of the ESG investments.

Industry sounds off against DOL proposal on ESG

More than $7.1 billion poured into ESG funds between April and June, according to Morningstar.

Aron Szapiro, Morningstar Inc.’s head of policy research based in Washington, said if the rule were to go into effect, plan sponsors would move away from any investments that consider ESG factors just to avoid the liability and additional costs, which would be to the detriment of retirement savers.

ESG investing in the U.S. has grown in popularity. Data from Morningstar show a nearly fourfold increase in 2019 over the previous year in flows into U.S. sustainable funds, at $21.4 billion, and record flows into ESG funds and into strategies based on ESG indexes in the first quarter of $10.5 billion.

The $246 billion California State Teachers’ Retirement System, West Sacramento, integrates ESG factors into its investment decision-making because it thinks they are “financially material and, foremost, because we have an obligation to our plan participants as long-term stewards of their capital,” Aeisha Mastagni, CalSTRS’ portfolio manager of sustainable investment and stewardship strategies, said in its comment letter.

“If the proposal is finalized with these amendments, fiduciaries will struggle to fulfill their obligations to deliver optimal returns by integrating all financially material risk factors which have been repeatedly proven to be pecuniary,” she said.

Stakeholders from across the world, including Europe, Canada and Australia, submitted comment letters in opposition to the proposal. The Brunel Pension Partnership, Bristol, England, which has about £30 billion ($36.3 billion) in assets, said in its comment letter that ESG factors can be financially material. “If the proposal goes into effect, it will undermine our ability to act in the long-term best interests of our beneficiaries,” its letter, signed by CEO Laura Chappell, said.