While the U.S. Department of Labor pushes rules that discourage environmental, social and governance (ESG) issues for pension plans subject to the Employee Retirement Income Security Act (ERISA), financial industry experts argued that the direction runs counter to the Department’s commitment to the long-term interest of millions of Americans saving for retirement.
“We believe that appropriately integrating ESG adds value and constraining consideration of these material issues for ERISA plan strategies runs contrary to the DOL’s stated objective of focusing on financial factors that affect investment returns for plan participants. In an uncertain world in which ESG matters more, not less, to strong corporate resiliency and sustainable performance, promoting material ESG considerations in investment decision-making is good for the long-term retirement security of millions of American savers,” Cyrus Taraporevala, the President and Chief Executive Officer of State Street Global Advisors; Rick Lacaille, Executive Vice President, Global Chief Investment Officer of State Street Global Advisors; and George Serafeim, Professor of Business Administration, Harvard Business School, said in a research note.
The authors believe that pension plans should consider the the full range of risks and opportunities that have a material effect on investment returns, which include ESG-related investments. Specifically, they note that it is important to distinguish between impact over returns (“values-driven investing”) and “value-driven” ESG investing that incorporates analysis of material ESG risks and opportunities in the same way that traditional financial metrics are considered.
“Increasingly, stock prices are reflecting investor awareness of the beneficial financial impact of more positive ESG characteristics during a novel period of economic and financial stress in which business model resiliency is paramount. Stronger cash flows, lower borrowing costs and higher valuations are common features of companies focused on managing material ESG risks,” the authors added.
“Especially for ERISA plan participants with long investment time horizons, the DOL should welcome ESG as an effective framework for promoting a long-term investment focus on value creation in a world that is often overly concerned with the short term alone.”
However, the authors concede that there are grey areas between material and non-material ESG issues and that fiduciaries would need to implement their own risk frameworks with the same degree of rigor and transparency through which other financial risks and value drivers are analyzed.
For more news, information, and strategy, visit the ESG Channel.