Senate Democrats ask DOL to back off ESG rule

Senate Democrats took aim this week at the DOL’s recently proposed ESG rule, crying foul over the racial implications it poses.

In a letter July 15 to Labor Secretary Eugene Scalia, the group of 13 senators wrote that the proposed restrictions on investments that use environmental, social and governance criteria “would discourage financial advisers from supporting racial justice.”

“Racial justice, corporate diversity and other ESG factors are increasingly a consideration in investment decisions,” the letter read. “Further, contrary to the skepticism and assumptions underlying the department’s proposed rule, ESG investments often outperform traditional investments and the overall financial markets, including over the past several years, showing investors can both achieve strong returns while driving positive change.”

Last month, the Department of Labor published a proposed rule establishing that retirement plan fiduciaries can only cite pecuniary reasons for choosing ESG funds to include on their plan menus. That has generally been the DOL’s position on ESG investments in the past, though it has allowed the environmental, social and governance benefits to be used in tie-breaker situations, in which, investment performance is virtually identical with non-ESG funds fiduciaries are also considering.

A formal rule is much more permanent and difficult to undo than guidance, which is what the DOL has previously used to outline its position. The newly proposed rule is seen by opponents as an answer in search of a problem — one that would essentially keep socially responsible and “green” investments out of plans. As of 2018, less than 3% of 401(k) plans had ESG products on their menus, and those investments represented 0.1% of plan assets, according to figures from the Plan Sponsor Council of America.

Importantly, the proposed rule would also prohibit ESG funds from being considered as default investment options — the main investments used by plan participants — or even used as a component of the default funds.

The letter, sent by Sen. Patty Murray, D-Wash., along with Sen. Tina Smith, D-Minn. and 11 others, asks Scalia to withdraw the proposed rule.

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The senators focus on racial equality issues that ESG investments can address, though they may address in a forthcoming letter the wider implications of restricting such products in 401(k)s and other defined-contribution plans.

“We are at pivotal moment in the fight against systemic racism in our country,” the letter read. “Yet, while people across the country demand accountability and reach for available tools to fight for racial and economic equity — from advocating for sweeping federal reforms to address systemic racism to taking smaller personal steps like supporting black-owned businesses — the department is moving in the opposite direction.”

As of 2018, only four Fortune 500 companies had black CEOs, and the vast majority of leadership was white, the senators wrote. Those company boards were also painfully lacking in diversity, with women and men of color representing just 4.6% and 11.5% of seats, according to the letter.

The DOL did not immediately respond to a request for comment.