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US DOL Queries Advisers Over ESG Investments

What’s happening? The US Department of Labor (DOL) has issued enforcement letters to registered investment advisors (RIAs) requesting their justifications for using ESG funds in retirement plans over the last five years. The mandatory, 13-part request concerns policies used in selecting funds and disclosures across investments. RIAs will have 14 days to comply. The DOL had earlier proposed limiting the number of ESG funds in retirement plans. Critics have said that the move may be due to pressure from energy-intensive industries. Some have maintained that the scrutiny and timeline may pose challenges for fiduciaries, impacting their receptiveness to ESG funds.

Why does this matter? This move follows proposals from the DOL that funds selected for retirement plans are chosen only on economic grounds. Adopting such a rule could potentially limit advisers’ ability to include ESG-focused offerings in plans.

The suggestion has been derided, with some pointing out performance of ESG products has been on par, if not better, than conventional fund products. Some of the US’ largest asset managers have also voiced opposition.  

The latest action, which has not been particularly widely reported, appears, however, to show the Trump Administration’s DOL doubling-down. RIAs are seemingly being given a short time to comply, in practice being asked to conduct an audit of their last five years of advice in two weeks.

Cynics may say the Administration – which has shown little desire to expand climate policy – may be trying to create an historical liability if retirees have missed out on returns by investing in ESG offerings.

There is certainly past evidence to suggest ESG investing was in the sites of the DOL. An executive order signed in April 2019 asked the Department to investigate retirement plans to identify whether “there are discernible trends with respect to such plans’ investments in the energy sector”.  The DOL also previously described ESG investing as not always being “prudent”.

With fossil fuel operations being hit heavily by the Covid-19 pandemic, are we seeing an attempt to restrict capital to alternatives, particularly given the president has recently courted support from the oil industry?

Lateral thought from Curation – It’s worth pointing out many corporates still adhere to the goals of the Paris Agreement on climate changes despite the Administration’s disdain for it. In absence of government mandating environmental action, are the US’ largest corporates becoming the de facto determinants of standards?

It’s perhaps worth noting concerns have been raised about the influence of BlackRock over the adoption of ESG metrics, albeit outside the US. The world’s largest asset manager’s recent appointment to advise the European Commission on sustainability frameworks for the continent’s banks is reportedly under investigation.

Nick Finegold is Founder & CEO of Curation Corp, an emerging and peripheral risks monitoring service.

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