US Labor Dept. should be withdraw 'redundant' proposed ESG rules: ACORE

The US Department of Labor's proposed rules on environment, social and governance investing are "redundant to the requirements of existing law" and should be withdrawn or modified, the American Council on Renewable Energy called said Oct. 5.

The proposed rule, issued Sept. 4, is "unnecessary to protect the interests of investors," ACORE said in a letter to acting Assistant Labor Secretary Jeanne Wilson. Rather than providing additional clarity around fiduciary compliance, "the proposed rule is instead likely to sow confusion and increase regulatory burden on ERISA fiduciaries," it said.

ERISA is the Employee Retirement Income Security Act of 1974. It requires that qualified investment advisors manage retirement plan assets, including the casting of proxy votes, for the "economic benefit of plan participants and beneficiaries."

Title I of ERISA requires plan fiduciaries to "select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action."

Labor's proposal would place restrictions on the use of investments with environmental, social and governance criteria in defined contribution retirement plans, such as 401(k)s. Under the proposal, plan fiduciaries are instructed not to make investment decisions that promote ESG goals above achieving the highest return possible for retirement savers.

The Labor Department has said that its proposed rule would "clarify" the pre-existing mandate that fiduciaries may only consider pecuniary indicators when selecting funds for retirement plans. The proposal requires that fiduciaries be able to prove ESG funds they selected were economically superior to alternatives in their risk and return.

The Labor Department announced its proposal at the end of June and set a 30-day deadline for comments. There have been over 8,730 comments submitted and the department has indicated they will announce their decision by the end of the year.

ACORE letter

The seven-page ACORE letter was signed by Tyler Stoff, ACORE's director of regulatory affairs. ACORE describes itself as a nonprofit organization "dedicated to advancing the renewable energy sector through market development, policy changes and financial innovation."

ACORE's letter comes on the heels of Climate Week in New York during the last week of September, during which there were countless webcasts explaining ESG. ACORE said that ESG considerations are "a form of risk mitigation," and that by reducing a company's ESG-related risks "can confer a long-term competitive advantage."

Neglecting climate and environmental risks, such as those arising from oil and gas exploration and production, coal ash disposal or nuclear safety, can result in the creation of stranded assets, negatively affecting a company's balance sheet or reducing dividends.

ACORE's Stoff said: "According to the Department's own analysis, the proposed rule will impose added costs on plan participants and beneficiaries, unless fiduciaries abandon their voting rights or adopt the Department's voting preferences."

Notably, Stoff wrote, the proposed rule "offers no evidence of harm to ERISA plan participants or beneficiaries due to proxy voting and fails to quantify any benefit justifying its consideration."

The proposed rule appears to be grounded, he said, "in an erroneous assumption" that ESG considerations are unrelated to financial performance and "inappropriately substitutes that erroneous assumption for the considered judgment of seasoned investment professionals exercising one of the most basic rights of stock ownership at the heart of fiduciary duty."

"There are too many other aspects of the proposed rule whose practical application would adversely impact ERISA fiduciaries, plan participants and beneficiaries," the letter said. "For these reasons, the proposed rule should be withdrawn."

If the proposed rule is not withdrawn, it should be "expressly modified to clarify that ERISA's fiduciary duties require qualified investment professionals to vote in favor of proxies that better align holdings with ESG metrics when they prudently determine that doing so is in the economic interest of plan participants and beneficiaries," Stoff wrote.