Morality vs money – the USA’s ESG dilemma

By Henry Adefope, Associate Partner

Earlier in June, the US Department of Labor (DoL) set out plans for a rule that would require private pension administrators to prove that they were not sacrificing financial returns by putting money into ESG-focused investments. Under the proposals, defined contribution pension plans would also be restricted from offering ESG funds as default investments — which is where many customers end up. The proposal also requires fiduciaries to provide evidence that ESG-oriented investments have been chosen solely on “objective risk-return criteria”.

To many commentators and critics, the proposed legislation looked to be an attempt to dissuade the use of ESG factors — at a time when more investors are including material ESG factors in their analysis than ever before.

Financial Services regulation in the USA is renowned for its ‘less enthusiastic’ approach to integrating responsible investment principles and climate reduction targets into investment structures than regulations in Europe or Asia.  

In the post-Greta, post-Covid, post clap-for-heroes climate, this proposed legislation has gone down like a lead balloon with climate campaigners, and perhaps surprisingly, also with the financial community, with many immediately pushing back. The DoL have had 1,500 complaints (600 on its website) since its big reveal; these are Celebrity Big Brother-type Ofcom complaint numbers we’re witnessing! 

Those lodging complaints included a host of the big investment management groups, academics, industry bodies and campaigners. The main theme of the complaints has been that the proposed legislation goes against current investment trends and ethical considerations, and most importantly, is a fiduciary risk that could jeopardize the retirement incomes of millions of people.

Universities are getting in on the melee too, with Harvard the latest to criticise the DoL for not reflecting ESG investment principles, and calling for it to take a similar approach to the Bank of England by empowering business to address the risks of climate change. 

It’s not very rock ‘n’ roll, but thinking and communicating responsibly are what stakeholders are demanding from investment managers, the biggest names appear to have chosen a side; and it’s the responsible one.  The ‘greed is good’ rhetoric looks to have lost its cool, especially across the financial sector, and especially among the big names.  

Comments on the new DoL guidance are encouraged up to 30 days after the official publishing of the rule proposal, with that consultation period potentially pushed out even further if lobbyists are to have their way with an extension that has the potential to allow even more complaints from business. 

The ensuing tug-of-war between the DoL and the financial services sector looks set to be intense and could potentially become an ideological tipping-point which will help determine whether responsible investing becomes core in the US or remains ancillary.  One for business leaders and their communicators to keep an eye on. The ongoing fallout and outcome will be telling for the global investment sector.