The U.S. Department of Labor – Proposed Rule Addressing ESG Investment Selections by Fiduciaries – the Drama Continues As Agency Downplays Importance of ESG

By Hank Boerner – Chair & Chief Strategist – G&A Institute

August 9 2020

In the early 1970s, Congressional hearings featured allegations of abuses by managers of corporate pension funds taking actions to systemically deny men and women approaching retirement age their promised benefits.  A law was passed to protect plan beneficiariesThe Employee Retirement Income Security Act of 1974.

This was intended by the Congress of that day to create standards for private-sector plans to protect the financial and health of beneficiaries of corporate plans.

The U.S. Department of Labor was designated is the primary designated arm enforcing “ERISA”,  charged with “protecting the interests of employee benefit plans participants (workers) and their beneficiaries”.

Other agencies have plan oversight responsibilities as well – the U.S. Treasury Department (the IRS) and the Pension Benefit Guaranty Corporation (PBGC).

PBGC is like the FDIC protection for bank customers’ money; when a corporate pension plan fails, the PBGC assumes responsibility for providing retirement benefits to retirees. When a company with a retirement plan goes belly up, filing bankruptcy, or giving up responsibility for the plan, the PBGC takes over to help the plan’s beneficiaries (they don’t get all that was promised by the plan when it was managed by the company they worked for).

Among other elements of the ERISA law and operating rules, there are standards set for fiduciaries and managers of worker retirement plans and welfare benefit plans.

ERISA has been updated since passage 40+ years back and the DOL rules have changed over time.  So have related Internal Revenue Service rules.  In 1978 the Internal Revenue Code was amended to allow taxpayers to have a tax-deferred, defined, voluntary retirement plan of their own – the familiar 401 (k) plan that millions participate in.

In the latest summary from the DOL’s Employee Benefits Security Administration of DOL (“EBSA“) for FY 2013(!) — ERISA rules [then] applied to 684,000 retirement plans, 2.4 million health plans and 2.4 million additional welfare benefits.

These plans covered 140 million workers and beneficiaries – at the time, that was about half of the American workforce – and assets under management of the plans exceeded US$7 trillion.

To simplify what follows here, the rules adopted by federal regulators are intended to explain and enforce the statute passed by Congress – in this case, protection of worker rights and oversight of fiduciaries managing workers’ assets in plans.

There is a structured process for creating the enforcing agency rules-of-the-road for those organizations being overseen (for ERISA, fiduciaries, plan managers) and these rules could be changed from time-to-time and also be “interpreted” by regulators through communications intended to clarify the rules.

ESG Investment and the Department of Labor Perspectives

As “sustainable” or “ESG” investing became a preferred approach for individuals in plans and managers of plans, many more institutions and individuals preferred those investments, alongside or instead of more traditional investments.

Investors want to be able to invest in an ESG-themed mutual fund or ETF along with or instead of a traditional version that may track a benchmark of the same type.

Example:  There are many investment managers whose fund track the widely-used S&P 500 benchmark (from S&P Global) and investable products with an S&P 500 ESG benchmark.

State Street a few days ago launched an S&P 500 ESG Exchange Traded Fund (ETF) “to provide investors an opportunity to tap into ESG investing at the core of their portfolio” (with a very low expense ratio). This “EFIV” tracks the new S&P 500 ESG Index.

SSgA explains: “ESG investing is approaching a critical inflection point…the collective call for change is growing louder and investor increasingly taking a stand through their investment choices.”

How do the regulators of ERISA react to such progress?  To the call for change?  To respond to investors’ call for action?

By moving backward in rule-making with changes in rules to make it more difficult for plan managers and beneficiaries to invest in ESG vehicles.

To be sure, rules are subject to change. The DOL’s first guidance on ESG investment issues as issued back in 1994.

More recently, in 2008 (during the Administration of President George W. Bush) guidance appeared to be designed to restrict ESG investments by plan fiduciaries.

In 2015 (during the Administration of President Barack Obama) DOL guidance gave the green light to ESG investments…if the investment is appropriate based on economic considerations including those that may derive from ESG factors. (See our perspectives here from November 2015: http://ga-institute.com/Sustainability-Update/big-news-out-of-the-u-s-department-of-labor-for-fiduciaries-opportunity-to-utilize-esg-factors-in-investment-analysis-and-portfolio-management/)

And now in 2020, in June DOL’s EBSA proposed a “new investment duties rule” with “core additions” to the regulations.  (“Financial Factors in Selecting Plan Investments” — this to address “recent trends involving ESG investing”).

Among the comments of DOL that really wrankled the ESG investor universe:

  • New text was added to codify DOL’s “longstanding position” that plan fiduciaries must select investments based on financial considerations relevant to the risk-adjusted economic value of an investment (or “course of action”).
  • The reminder that “Loyalty” duty prohibits fiduciaries from subordinating interests of plan participants and beneficiaries to “non-pecuniary goals”.   ESG factors could be “pecuniary” factors — but only if they present economic risk/opportunity under generally-accepted investment theories.
  • New text was added on required investment analysis and documentation for the “rare circumstance” when fiduciaries are choosing among “truly economically-indistinguishable” investments.  (Huh?)
  • A provision that fiduciaries must consider “other” available investments to meet prudence and loyalty duties.
  • A new provision for selection of investment alternatives for 401-K plans describes what is required for “pursuing” one or more ESG-oriented objectives in the investment mandate (or include ESG “parameters” in the fund name).

DOL Comments On These:

“ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy…is to subordinate return or increase risk for the purpose of non-financial objectives.”  And

“Private [Sector] employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives…not in the interest of the plan…ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.”

After the rule changes were published, numerous investors pushed back – some summaries for you that were published on the 401K Specialist web platform of the responses of some fiduciaries who object to the proposed rule (“Commenters Hammer DOL of Proposed  ESG Rule”).

More than 1,500 comments have been submitted so far to DOL, calling for changes in the proposed rule, withdrawal, and the very short comment period (just 30 days, ended August 3, vs. the usual 90 days).

Investor/Fiduciary Pushback:

T. Rowe Price:   The proposed rule is attempting to solve a problem that does not exist. Worse, the proposed rule discourages fiduciaries from taking into account ESG factors that should be considered.

ICCR/Interfaith Center on Corporate Responsibility:  The rule would impose significant analytical and documentation burdens on fiduciaries of benefit plans governed by ERISA wishing to select (or allow individual account holders to select) investments that use ESG factors in investment analysis, or that provide ESG benefits (signed by 138 member institutions).

ESG Global Advisors: The Proposal has misunderstood and/or mischaracterized the nature and purpose of ESG integration…this is likely to lead to confusion for ERISA fiduciaries and additional costs to plan savers. Plan fiduciaries will struggle to fulfill their obligation to integrate all financially-material ESG risk factors into their investment process.

Morningstar: The Department’s rule is out of step with the best practices asset managers and financial advisors use to integrate ESG considerations into their investment processes and selections. The proposed rule would…erect barriers to considering ESG factors that many financial professionals consider as a routine part of investment management…

Voya Financial Inc.: The Proposal is fundamentally flawed for two reasons…among the many qualitative factors an ERISA fiduciary may appropriately consider…the Proposal singles out ESG factors and subjects them to special tests…second, the Proposal fails to account for the positive effect on investment behavior that the availability of ESG-focused investment options can have…

American Retirement Association: …appropriate investments that include ESG factors should not be prohibited from qualifying as Qualified Default Investment Alternatives (“QDIAs”)…

The Wagner Law Group:  The proposed amendment is inconsistent with existing law and guidance…it would require fiduciaries to only consider pecuniary factors instead of using their judgment and discretion to evaluate investments under the totality of circumstances…a narrow list of permissible factors is inconsistent with the notion that prudence is not determined by a checklist and is a fact-specific determination…

BlackRock:  …the Proposal creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially-material ESG factors…we urge DOL to engage with the industry to understand how investment options incorporating ESG factors are used in ERISA plans…

Members of Congress – the body that passed ERISA during its 93rd session in 1974 – reacted along partisan lines.

Republican members of the House Committee on Education and Labor submitted a letter of support of the DOL action.

Democrat Party members (41 of them) of the House and 20 members of the House Education and Labor Committee expressed opposition to the rule changes.

The Securities & Exchange Commission is looking at ESG investments as well – soliciting public comment “for the appropriate treatment for funds that use terms such as ESG in their name and whether the terms are likely to mislead investors” (also in the Federal Register post).

In May 2020 the SEC Investor Advisory Committee / Investor-as-Owner Subcommittee issued their perspectives on ESG disclosure:  https://www.sec.gov/spotlight/investor-advisory-committee-2012/recommendation-of-the-investor-as-owner-subcommittee-on-esg-disclosure.pdf

There are more details for you here (the investor response summaries): https://401kspecialistmag.com/commenters-hammer-dol-on-proposed-esg-rule/

The Department of Labor’s EBSA proposal highlights are here as published in the Federal Register, June 30, 2020: http://ga-institute.com/Sustainability-Update/big-news-out-of-the-u-s-department-of-labor-for-fiduciaries-opportunity-to-utilize-esg-factors-in-investment-analysis-and-portfolio-management/

Notes:  The Secretary of Labor is Eugene Scalia, a nominee of President Donald Trump.

Acting Assistant Secretary for EBSA is Jeanne Klinefelter Wilson (appointed in June 2020).

There is an ERISA Advisory Council with six members.  Effective July 14, 2020:

  • Glenn Butash is chair; he is managing counsel at Nokia Corp.
  • David Kritz is vice-chair; he is deputy counsel at Norfolk Southern Corp.
  • John Harney is partner at law firm O’Donoghue and O’Donoghue.
  • Peter Wiedenbeck is Washington University School of Law professor.
  • James Haubrock is CPA and shareholder, Clark Schaefer Hackett.
  • Lisa Allen is compliance consultant, Altera Group.

Stay Tuned:  We will update you when decisions are announced by the Department of Labor.

The Climate Change Crisis – “Covering Climate Now” Can Help to Shape The Public Dialogue

Introducing a new series of perspectives from G&A Institute…

by Hank Boerner – Chair & Chief Strategist, G&A Institute

We are bringing you a series of commentaries on the climate change crisis to share news, research results and perspectives to you in an organized way.

Fact:  We are facing dire outcomes for humanity and planet if we don’t move faster with strategies and actions to address the challenges of climate change.

We’re calling our shared perspectives “About the Climate Change Crisis”.

Global Warming.  Droughts. SuperStorms. Floods.  Rising Seas. Outbreaks of forest fires.  Loss of Species.  Degradation of farmlands.  Food Shortages. 

These should be defined as crisis situations, no?

Despite these dangers, the public dialogue on “climate change” issues in the United States reflects in some ways the divide in public opinion on critical issues facing the American public, government, business, the financial sector.

Climate changing? Yes and No. Human activities  causing the changes? Yes and No.
Should we be worried? Yes and No.

And so it goes.

The United States of America participated in the 2015 Paris (COP 21) meetings and signed on to the Paris Agreement along with almost 200 other nations, with President Barack Obama becoming a signatory in April 2016 and in September 2016 by presidential action presented the necessary documents to the U.N. General Secretary Ban Ki-moon.

The People’s Republic of China also presented the documents, a collaboration negotiated by President Obama. (This step by Barack Obama avoided presenting what amounted to an international treaty agreement to the U.S. Senate for ratification, required by the U.S. Constitution – approval assuredly would not happen in today’s political environment.)

The U.S. also contributed US$3 billion to the Green Climate Fund.

And so also by executive order, his successor in the Oval Office, President Donald Trump in March 2017 with swipe of a pen signaled the start of the complex and lengthy process of removing the U.S. from the historic Paris Agreement to limit the damage of global warming.

By his side: EPA Administrator Scott Pruitt (since gone from the environmental agency).

The backdrop: scientific reports that 2016 was the warmest year on record to date!

And credible scientists telling us that we have a decade at most to get control of climate change issues!

Prior to becoming president Donald Trump declared among other things that climate change was a Chinese hoax. (One of his positioning comments on the subject: “The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive” – November 6, 2012 tweet.)

But climate change is real – and we face a climate crisis in 2019!

What Did the Current U.S.A. Leader Do?

President Trump on November 4, 2019 officially notified the international community – and specifically the community of the United Nations – that the process of withdrawal was beginning and would be complete one year from now — the day before Election Day 2020.

Note that in November 2018 the government of the United States of America published the fourth climate change assessment by key U.S. government agencies: the “Climate Science Special Report” was prepared by the U.S. Global Change Research Program of the Federal government. (We’ve including an overview in this series.)

The contents are of significance if you are an investor, a company executive or board member, an issue advocate, public sector officer holder or civic leader, consumer — or other type of stakeholder.

There are volumes of data and descriptions in the report presenting a range of “high probability” climate change outcomes in this the 21st Century.

Adding credibility to the Federal government’s report to the nation and the world:  11, 258 scientists in 153 countries from a broad range of disciplines (biosciences, ecology, etc.) published a report in the Bioscience Journal (November 2018) – “World Scientists’ Warning of a Climate Emergency” – setting out a range of policies and actions that could be (adopted, taken) to address the emergency.

Good News About News Media

Good news from the purveyors of news to millions of people: the publishers of Columbia Journalism Review and The Nation created the “Covering Climate Now” (the initiative was launched in April 2019) intended to strengthen the media’s focus on the climate emergency.  The lead media partner is The Guardian.

The founders are now joined by cooperating media that today reaches more than one billion people worldwide. Representatives of 350 newsrooms in 32 countries have joined to ramp up coverage of the climate crisis and possible solutions. The campaign is designed to strengthen the media’s focus on the climate emergency.

Combined, the cooperating media reach more than one billion people worldwide.

Participants in the campaign include Bloomberg, Agence France-Press, The Guardian, The Minneapolis Star Tribune, The New Jersey Star Ledger, The Oklahoman, Corporate Knights, The Philadelphia Inquirer, The Seattle Times, La Republica (Italy), The Hindustan Times (India), Asahi Shimbun (Japan), La Razon (Spain), Greenbiz.com, Huffpost, Mother Jones, Rolling Stone, Scientific American, Teen Vogue, Vanity Fair, and many many other communications platforms.

Partner organizations in the campaign include wire services, news agencies, newspapers, magazines, digital news sites, journals, radio, podcasters, and institutions like Princeton University and Yale Climate Change & Health Initiative.

Could it be that the press, especially the U.S. press, can turn the tide of public opinion (with the naysayers and public doubters) with increasing and accurate coverage of the climate story?

Is the “media awake”?   That question was posed and answered in September 2019 by Mark Hertsgaard (The Nation) and Kyle Pope (CJR editor) addressing the  initiative.

Their comments are here for you: https://www.cjr.org/covering_climate_now/climate-crisis-new-beginning.php

Is this where you get your news a participant? Check the list here: https://www.coveringclimatenow.org/partners

Participating publisher Corporate Knights points out to us that “climate change” was suggested as a term to use by pollster Frank Luntz to President George W. Bush instead of the more frightening term, “global warming”. Let’s not scare the people. Gently move them forward.

We do need to return to the more accurate and realistic title of global warming. The threats posed by warming of land and sea are visible to us – every day now!

But, OK, if climate change is the popular branding, then let’s talk about the climate change crisis or emergency (so says the media collaboration).

We’re presenting this series of climate change crisis commentaries to help to tell the story of the climate change crisis or emergency.

The title is About the Climate Crisis, following the lead of the collaborating journalists.

The Good News

The good news as background to the above is that cities and states are “still in” and implementing strategies and actions to follow the Paris Accord in their jurisdictions. 

Corporations participated in the Conference of Parties (COP) meetings and especially the Paris COP 21 meetings.

Companies have been launching and reporting on their sustainability journey — actively addressing climate change issues — and investors are building more climate change considerations into their financial analysis and portfolio management. 

Combined these actions are keeping the United States in the game and helping to maintain the nation’s edge in climate change matters. Of course, we can ALL do more!

Let us know how we are doing. And please do suggest to us issues and topics and developments that might be of interest to you and other readers of the G&A Institute’s Sustainability Update blog.

Please do Stay Tuned to our ongoing blog commentaries.

Critical Development for CDP Responders in 2018 & 19: CDP Introduces Additional Alignment With FSB Task Force on Climate-Related Financial Disclosures Recommendations

By Hank Boerner – Chair & Chief Strategist, G&A Institute

Corporate ESG Data, Data, Data – it’s now everywhere and being digested, analyzed and applied to corporate equity analytics and portfolio decision-making.

Whether your public company participates in the annual round of organizing responses to the ever-more comprehensive queries from leading ESG / sustainability / CR rating agencies or not, there is a public ESG profile of your company that investors (asset owners, managers and analysts) are examining and applying to their work.

If you don’t tell the story of your firm’s progress in its sustainability journey, someone else will (and is).  And if you have not embarked on the journey yet…and there is not much to disclose and report on…you are building the wrong kind of moat for the company.  That is, one that will ever-widen and impair access to capital and affect the cost of capital.  And over time, perhaps put the company’s issues on the divestiture list for key investors.

This sounds a bit dramatic, but what is happening in the capital markets these days can be well described as a dramatic shift in focus and actions, with corporate ESG strategies, actions, programs, achievements, and disclosure becoming of paramount importance to a growing body of institutional and retail investors.

Consider these important developments:

  • The influential Barron’s editors, reaching hundreds of thousands of investors every week, beginning in Fall 2017 made coverage of corporate sustainability and sustainable investing a mainstay of the magazine’s editorial content.
  • Morningstar, the premier ranker of mutual fund performance, added sustainability to the analysis of funds and ETFs with guidance from Sustainalytics, one of the major ESG rating firms (and Morningstar made a significant investment in the firm).
  • SustainableInvest, headed  by Henry Shilling, former leader on sustainability matters for Moody’s Investor Service, noted that in 2Q 2018 as the proxy season was ending, 2018 voting was notable for the high level of “E” and “S” proposals, some achieving majority votes in shareholder voting at such firms as Anadarko Petroleum, Kinder Morgan and Range Resources.  Assets in 1,025 sustainable funds analyzed added $14 billion during 2Q and ended in June at US$286 billion; more than $1 billion was new net cash inflows, demonstrating investor interest in the products.

Significant:  according to the Harvard Law School Forum on Corporate Governance and Financial Regulations, two-thirds of investor-submitted proxy resolutions focused on having the company follow through on the 2-degrees scenario (testing) were withdrawn and company boards and managements agreed to the demand for climate risk reporting.

The FSB TCFD Impact on Corporate Sector and Financial Services Sector

The Financial Stability Board, an organization founded by the central bankers and financial leaders of the G-20 nations, created a Task Force on Climate-related Financial Disclosures (“TCFD”) to develop climate-related financial disclosures for adoption by financial services sector firms and by publicly-traded companies in general.

The 32-member Task Force, headed by Mayor Michael Bloomberg, announced financial recommendations for companies and investors in June 2017.

The essence of the recommendations:

  • Corporate boards and managements should focus on the risks and opportunities present and in the future taking into account a global temperature risk of 2-degrees Centigrade (3.5-F), and in the future, 4-C and even 6-C global temperature rises.

The risks (presented are not just to the affected companies but to the financial sector institutions investing in the company, institutions lending funds to the company, carriers insuring the company, etc.).

The risks and opportunities related to climate change should be thoroughly analyzed using the scenario testing that the company uses (an example would be projecting future pricing, regulations, technologies, and “what ifs” for an oil and gas industry company).

The company should consider in doing the scenario testing and analyzing outcomes the firm’s corporate governance policies and practices; strategies for the long-term; risk management policies and resources; establishing targets; and, putting metrics in place for measuring and managing climate risk.  Then, the next step is disclosing this to investors and other stakeholders.

Key Player:  CDP and its Wealth of Corporate, Institutional and Public Sector Data

The CDP – formerly known as the Carbon Disclosure Project – was founded almost two decades ago (2000) as a United Kingdom-based not-for-profit charity at the urging of the investment community, to gather corporate “carbon” data.

Timing:  soon after the start of meetings of the “Conference of the Parties” (or “COP”), organized by the United Nations as the Climate Change Conferences. (The “UNFCCC”.)

In the mid-1990s, the Kyoto Protocol emerged that legally-bound nations to their pledge to reduce Greenhouse Emissions (GHGs).  The U.S.A. did not sign on to the global protocol during the tenure of President George W. Bush, and the agreement reached in Paris at the COP meeting in 2015 was finally agreed to by President Barack Obama.

And then began the process of withdrawal under President Donald Trump.  The U.S.A. is now the prominent holdout (among the community of 197 nations signed on) in the global effort to address global warming before the danger point is passed.  In Paris, the COP agreed that the threshold was 2-degrees Centigrade.

Today, a growing universe of investors and many other stakeholders are increasingly focused on the role of carbon emissions in the framing of questions about what to do as scientists charted the warming of Earth’s climate.

And so — ESG / environmental data is critical to the mission of determining “what to do” and then implementing measures to address climate change challenges.

The Critical Role of CDP 

CDP over almost two decades since its founding has become the premier repository of corporate data related to climate change – with more than 6,000 companies’ data collected and shared in organized ways with the investment community.  (That includes the ESG data of half of the world’s public companies by market cap.)

The CDP emissions data focused has broadened over 16 years to now include water, supply chain, forestry (for corporates) and environmental data from more than 500 cities and some 100 states and regions available to investors.

Key user base:

  • 650-plus institutional investors with US$87 trillion in Assets Under Management.
  • Corporate Supply Chain members (such as Wal-Mart Stores) that collect data from their suppliers through CDP—a universe of 115 companies with over $3.3 trillion in combined purchasing power.

When the TCFD recommendations were being developed, CDP announced a firm commitment to align with the task force recommendations.

Following their release of the Task Force recommendations in July 2017, CDP held public consultations on a draft version of the TCFD-aligned framework. The current 2018 Climate Change questionnaire that corporations received from CDP is fully aligned with the TCFD recommendations on climate-related disclosures related to governance, risk management, strategy, and metrics and targets.

The TCFD recommendations are already aligned with the majority of CDP’s longstanding approach to climate change disclosure, including most of the recommendations for climate-related governance, strategy, risk management as well as metrics and target disclosure.

However, this year CDP has modified some questions and added new ones — the most impactful being on climate-related scenario analysis to ensure complete alignment.

Some modifications include:

The Governance section now asks for more information about oversight of climate change issues and why a company doesn’t have board-level oversight (if applicable). CDP also requests information about the main individual below the board level with the highest responsibility — and how frequently they report up to the board.

Next, in the risks and opportunities section, CDP now asks for the climate-related risk & opportunity identification, and assessment process.

As in past years, questions are posed in the Business Strategy module to allow companies to disclose whether they have acted upon integrating climate-related issues into their strategy, financial planning, and businesses.

CDP has also added a question for high impact sectors on their low carbon transition plans, so data users can gauge and further understand the sustainable and strategic foresight that these companies aim to achieve.

CDP also added a new question on scenario analysis, explaining that scenario analysis is a strategic planning tool to help an organization understand how it might perform in different future states.

A core aim of the TCFD recommendations is for companies to improve their understanding of future risks and develop suitable resilience strategies.

Finally, the TCFD recommendations highlighted five (5) sectors as the most important. In 2018, CDP rolled out sector-specific questions for the four non-financial sectors that the TCFD highlighted (they are energy, transport, materials, and agriculture).

TCFD also highlighted the financial sector – looking forward, in 2019, CDP is planning to release a financial sector-specific climate change questionnaire.

The TCFD resources for investors and corporate managers are embodied in three documents – (1) the Main Report; (2) an Implementation Annex; (3) the Technical Supplement for Scenario Analysis.  These are available at:  www.fsb-tcfd.org

G&A Institute Perspectives:

Our team has been assisting corporate managers in organizing the response to the CDP annual survey and we’ve tracked over the years the steady expansion of information requested of companies.

Our advice to companies not reporting yet:  get started!  The CDP staff members are very cooperative in assisting new corporate reporters in understanding what data are being sought (and why) and providing answers to questions.

CDP’s founding CEO Paul Simpson cautions:  “Big companies:  get better at telling those who hold the purse strings how climate risks could affect your bottom line.”

And so, our mission at G&A includes helping corporate issuers tell a better sustainability and ESG story, including the story told in the data sets communicated to 650-plus institutional investors by CDP!

CDP data is everywhere, we advise clients, including for example being part of the volumes of ESG data sets that Bloomberg LP shares on its terminals (through the terminal ESG Dashboard).

On the supply chain side, we point out that more than US$3 trillion is the collective spend of companies now addressing their supply chain sustainability factors and environmental impacts (customers see suppliers as part of their own CDP footprint).  Corporate leaders in this effort include Apple, Honda and Microsoft, CDP points out.

Resources:

CDP’s Technical Notes on the TCFD are available at: https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/guidance_docs/pdfs/000/001/429/original/CDP-TCFD-technical-note.pdf?1512736184

The “A” List of CDP naming the world’s business leaders on environmental performance (160 firms) is at: https://www.cdp.net/en/scores-2017

The CDP USA Report 2017, focused on key findings on Governance, ESG and the Role of the Board of Directors is available at: https://b8f65cb373b1b7b15feb-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/002/891/original/CDP-US-Report-2017.pdf?1512733010

There’s an excellent interview with CDP CEO/Founder Paul Simpson at: http://www.ethicalcorp.com/disruptors-paul-simpson-atypical-activist-who-woke-c-suites-climate-risk

You can check out Henry Shilling’s SustainableInvest.com at: https://www.sustainableinvest.com/second-quarter-2018-sustainable-funds-investing-review/

 

Big News Out of the U.S. Department of Labor For Fiduciaries — Opportunity to Utilize ESG Factors in Investment Analysis and Portfolio Management

by Hank Boerner – G&A Institute Chairman

Back in the late-1960s and early 1970s, as allegations of older worker retirement abuses gained wide media attention, members of the U.S. Congress focused on “retirement security” issues. After high-profile committee hearings, the Congress passed the Employee Retirement Income Security Act of 1974, signed into law by our 40th CEO, President Gerald Ford. The U.S. Department of Labor was assigned to develop and oversee the operating rules-of-the road for retirement plan fiduciaries — including public employee pension systems; corporate retirement plans; endowments; foundations; trusts.

Over the next 30 years the Department of Labor’s operating arms for regulating “ERISA” — especially including the Employee Benefits Security Administration — tweaked the rules & regulations with such actions as clarifying letters (such as to the Pacific Coast Roofers Pension Plan and the Northwestern Ohio Building Trades and Employer Construction Industry Investment Plan) and a series of “interpretive bulletins” to clarify the rules for fiduciaries.

The passage of ERISA was a great boon for many Americans. The law opened the door for institutional investors to dramatically expand their investments in other than the traditional “prudent man” vehicles of old, like U.S. Treasury notes, bills and bonds and municipal bond issues. Trillions’ of dollars flowed into the equities market after the 1970s and trading volume (at exchanges) soared.

Many of us benefited directly and indirectly from ERISA, including individuals opening 401-k plans made possible by the legislation. The portfolios of public pension funds in particular soared in total value. (CalPERS, the California public employee plan, has US$300 billion in AUM; $150 billion of these assets are in public equity.)

The financial good times rolled, in large measure due to ERISA!

Periodically, the ERISA officials (working under the political appointees of various U.S. Presidents) would issue guidance. The cottage industry of law firms, accounting firms, pension consultants, actuaries and other ERISA-focused professionals grew by leaps and bounds. And, from the early 1980s on, there was steadily growing embrace of new approaches to investing, and new products ginned up with retirement “security” in mind.

Game Changer: The Emergence of Sustainable Investing

The new approaches included embrace of ESG performance for greater analysis [by asset owners and asset managers], and greater focus on and inclusion of ESG-related products offered by financial services firms for fiduciaries’ portfolios (mutual fund, indexes, benchmarks, etc). The latest survey by the Forum for Sustainable & Responsible Investing (US SIF) established a high water mark: a total of US$6.2 trillion in Assets Under Management were managed using ESG approaches as we entered 2014; that’s $1 in $6 in U.S. equity markets. The US SIF was in the vanguard in getting the Department of Labor guidance clarified regarding ESG investment.

Emblematic of the changes taking place as the Department of Labor prepared its latest guidance, S&P Dow Jones Indices (part of McGraw Hill Financial) busily announced three new climate change index series — two focused on carbon efficiency, and a fossil fuel free index. “Climate change and its impact present a challenge from an investment perspective,” said the index company.

2008 ERISA Guidance — Chilling Effect for ESG

In October 2008, in the waning days of President George W. Bush’s Administration, the Department of Labor issued its Interpretive Bulletin Relating to the Fiduciary Standard in Considering Economically Targeted Investments (“ETIs” in government-ese). The regulators’ guidance was interpreted by many investors as saying that only financial risk and return could be considered by the tens of thousands of fiduciaries in the USA overseeing pension funds, etc. “Other” considerations, such as a company’s ESG performance, were not acceptable.

Never mind that sustainable investing was growing significantly in importance in the U.S. and global capital markets. Never mind that the collapse of the stock market in 2008, thanks to the reckless behavior of the big bank holding companies, and look-the-other way regulators. The dives of stock prices would drive investors to the safety offered by sustainable investing products and instruments. Never mind that a growing army of stakeholders saw sustainable investing — that is, investing with collateral interests as well as the traditional financials — was becoming mainstream.

October 2015 ERISA Guidance – Encouraging!

Institutional investors (asset owners) and professional asset managers began engaging with Department of Labor officials soon after President Barack Obama took office to discuss DoL guidance for plan fiduciaries. Since 2009, of course, ESG-focused investments have soared in volume. One after another academic studies have been published to provide evidence that sustainable investment has clear financial payoff as well as “collateral” benefits. (Think:  Who would not encourage company managements to lower their environmental liabilities, create more “green” products that consumers want, improve policies and actions involving the diversity of their enterprises, avoid regulatory costs including fines, and more, more, more in terms of becoming a more sustainable company attractive to a greater number of investors?)

In late-October, the DoL’s Employee Benefits Security Administration issued an updated Interpretive Bulletin — this time, clearly stating that terms like socially responsible investing, sustainable & responsible investing, ESG investing, impact investing, and economically targeted investing (ETI), while not uniform in meaning…are related to any investment that is selected in party for its collateral benefits apart from investment return to the investor.

The Bulletin is being distributed via the Federal Register now to explain to fiduciaries that the 2008 Bulletin is officially withdrawn and replaced with language that reinstates the language dating back to 1994 (setting out the basic advice that fiduciaries should act prudently to diversify their plan to minimize the risk of large losses).

Highlights of the new DoL ERISA guidance:

• In updated terms, guidance includes plan consideration of ESG factors such as environmental, social or corporate governance (ESG) — these do not need special scrutiny (as the 2008 guidance implied). The 2015 Bulletin specifically refers to such current terms-of-art as sustainable & responsible investing.

• Fiduciaries should not be dissuaded from pursuing [such] investment strategies as those that consider ESG factors, even when they are used solely to evaluate the economic benefits of investments and identify economically superior instruments and investing in ETIs [where they are economically equivalent].

• When a fiduciary prudently concludes that such an investment is justified solely on the economic merits of the investment, there is no need to evaluate collateral goals as “tie breakers.” And, setting aside the 2008 advice, there is no need for considerable documentation as to why (for example an ESG investment) was chosen.

• The Labor Department does not believe ERISA (the 1974 law and subsequent rules & regulations, and opinions) prohibits a fiduciary from addressing ETIs or incorporating ESG factors in investment policy statements or integrated ESG-related tools, metrics and analyses to evaluate an investment’s risk or return or choose among otherwise equivalent investments.

Cautionary guidance: In issuing the October 2015 Bulletin the DoL staff reminds fiduciaries that section 403 and 404 of ERISA do not permit fiduciaries to sacrifice the economic interests of the plan participants in receiving their promised benefits in order for the plan to pursue collateral goals. BUT — the DoL has “consistently recognized” that fiduciaries MAY consider collateral goals as tie-breakers when choosing between investment alternatives that are otherwise equal with respect to risk and return over the appropriate time horizon.

ERISA does not direct investment choice where investment alternatives are equivalent and the economic interests of the plan’s participants and beneficiaries are protected if the selected investment in economically equivalent to competing instruments.

Setting the Record Straight

The 2008 guidance appeared to say that investing with collateral goals in mind should be rare, and had to be documented to demonstrate compliance with ERISA’s “rigorous standards.” The 2015 guidance sets the record straight: “Plan fiduciaries should appropriately consider factors that potentially influence risk and return — ESG issues may have a direct relationship in the economic value of the plan investment. These issues are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”

Again, underscoring for the record: The Department does not believe ERISA prohibits a fiduciary from addressing ETIs or incorporate ESG factors in investments….

We could say that investors encouraging such actions as fiduciaries divesting fossil fuel companies because of concerns about “stranded assets” left in the ground (and not be counted as reserves) can breathe easier with the new DoL guidance.

John K.S. Wilson, head of corporate governance and engagement at Cornerstone Capital Group noted in response to the guidance: “An important purpose of this Interpretive Bulletin is to clarify that plan fiduciaries should appropriately consider factors that potentially influence risk and return. Environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investments. Collateral benefits include environmental protection, social equity and financial stability, which Cornerstone considers necessary outcomes for the mitigation of long-term macroeconomic investment risk.” (Wilson is the former director of corporate governance at TIAA-CREF, where he oversaw voting of proxies at the CREF portfolio (8,000 companies.)

Sending a Clear Signal to Plan Fiduciaries

We see the Interpretive Bulletin as sending a clear signal to U.S. fiduciaries that considering ESG factors is recognized as an important part of the fiduciary’s duty in evaluating risk and return. As Social Finance commented in its reaction — “US DOL Announced ERISA Guidance to Unlock Impact Investments.” Over time — the guidance will (unlock ESG investing’s power. that is)!

You can read the U.S. Department of Labor Interpretive Bulletin summary at: http://www.dol.gov/opa/media/press/ebsa/EBSA20152045.htm

# # #

Congratulations to US SIF chief executive officer Lisa Woll and her colleagues in continuing the long engagement with the Department of Labor to get clear guidance on ESG investing. Sustainable investing champions involved in the long engagement with the Department of Labor include Adam Kanzer (Domini Fund); Jonas Kron (Trillium); Meg Voorhes (SIF); Tim Smith (Walden Asset Management).