Nothing could better illustrate the disastrous direction the US Government is currently taking on sustainability than its Department of Labor’s investigation into the use of ESG funds as part of US DC plans.
While last week saw the UK’s equivalent (DWP) mandating master trusts to adopt ESG principles by aligning with the TCFD, across the pond the US authorities were putting the fear of God into plan sponsors daring to do the same.
Quoting from the US Pensions and Investments website Pionline…
The U.S. Department of Labor has initiated a behind-the-scenes industry inquiry into the use of ESG investments in defined contribution plans, a move that many say supports proposed regulations to make it harder to include socially responsible funds in retirement plans.
In an enforcement letter sent to employers with environmental, social and governance-themed funds in their investment lineups, the agency requested a slew of documents, including materials showing the “names, addresses and responsibilities of all persons or entities with responsibility for making investment decisions.”
Initially , having previously supported ESG investment, the DOL’s behaviour was supposed to be about wasting money on “green-washing”, a practice where fund managers rinse money into their coffers by charging for green funds which do nothing to improve E S or G.
However there is now a conspiracy theory that pressure is coming from the White House to prevent investment managers suppressing Republican’s predilections. Specifically their encouragement to middle America to burn fossil fuels, businesses to redistribute from poor to the rich and lawmakers to ignore the principals of good governance accepted in other western democracies.
Wealth in the US is increasingly concentrated in the hands of an elite 10% and these DC pensions (known as 401k plans) one of the few areas where private individuals participate in the growth of US markets.
Industry observers believe that the inquiry and proposed rule-making are likely to have a chilling effect on plan sponsors looking to add ESG investments to their plans. Sponsors are “stepping carefully,” Mr. Levine said, noting that processes to add socially responsible funds “may have slowed down” in some cases.
“I think plan sponsors are probably more reluctant to take a risk and add a fund that is not 100% best of its class if it has an ESG factor to it,” said one of these observers.
Speaking as a Brit who is proud of the stance on climate change investments taken by our DWP this week, I am very glad not to be American.
Sixteen years is a long time in pensions.
The original Myners’ Principles for UK DB schemes in 2004 included this one:
6. Activism
The mandate and trust deed should incorporate the principle of the US Department of
Labor Interpretative Bulletin on activism. Trustees should also ensure that managers have an explicit strategy, elucidating the circumstances in which they will intervene in a company; the approach they will use in doing so; and how they measure the effectiveness of this strategy.
Within the year, that DoL reference was replaced by something called the Institutional Shareholders’ Committee’s statement of principles. I wonder what became of them?
http://labourandcapital.blogspot.com/2014/08/end-of-line-for-institutional.html tells you what happened to the ISC.
It’s said to have been replaced by the Investor Forum https://www.investorforum.org.uk/about/history/
This blog tells you what happened to the UK’s ISC:
http://labourandcapital.blogspot.com/2014/08/end-of-line-for-institutional.html
Its wider role seems to have been taken up by the Investor Forum.
https://www.investorforum.org.uk/about/history/
I wondered where they stand on climate change?
These words are taken from their most recent 2019 annual review may satisfy you, Henry, although frankly they do little for me:
“The world is watching. The UK remains a leader both in corporate governance and in stewardship, with a number of countries having modelled their own approaches on UK codes. Similarly, there is a good deal of interest around the world in collective engagement models such as the Investor Forum (for example, the recent report by France’s Club des Juristes mentions the Investor Forum as a model collective body that France might wish to replicate). The way in which the industry responds to the new Stewardship Code is likely to shape not only the landscape of engagement locally but also globally. Such a global response is needed to rise to some of the challenges that we face, not least climate change.”