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New ESG-Related Regulatory Proposals May Hinder Fiduciary Duties

Dave Zellner and Jake Barnett portrait photos

October 21, 2020

In many ways, 2020 has been a landmark year for sustainable investing. Interest is growing in funds that incorporate environmental, social and governance (ESG) factors. The events of recent months also make it clear that new investment solutions are needed to solve systemic issues.

It comes as somewhat of a surprise then that the U.S. Department of Labor (DOL) has decided now is the time to discourage fiduciaries’ ability to use ESG considerations in investment decision making.

Indeed, the DOL, which regulates Employee Retirement Income Security Act (ERISA) plan fiduciaries, this year introduced two separate proposed rule changes that could potentially limit ESG integration and shareholder rights. The first proposed change would impose hurdles on when ERISA fiduciaries can evoke the consideration of ESG factors, while the latest, introduced in late August, would add additional regulatory hurdles for proxy voting by plan managers.

We note that Wespath and its subsidiaries are not subject to ERISA regulations as the law does not cover church plans. Nevertheless, Wespath shares the concerns held by the overwhelming majority of the investment industry and employer plan sponsor community, which oppose these rules.

Most readers will know by now that Wespath takes a comprehensive approach to sustainable investment that considers ESG factors as they relate to investment management. Our robust process for proxy voting is part of this sustainable investment focus. We firmly believe sustainable investment activities strengthen our potential for consistently providing reliable, long-term financial returns, helping us fulfill our fiduciary responsibilities. This is clearly stated in our Sustainability Investment Belief and is affirmed more specifically in additional investment beliefs.

Take climate change, for example. This is one of the most pressing ESG issues of our times, and we believe it has rather clear investment implications. In fact, as stated in our Low-Carbon Transition Investment Belief, we think a “global transition to a low-carbon economy is underway” and it is creating “winners and losers across companies, industries and countries, impacting investment returns.”

Accordingly, we believe an ERISA plan, and any investor, would be abrogating its fiduciary duty by not voting on resolutions related to climate change. The same could be said about many other ESG issues that have material financial implications for plan assets.

To be clear, we view shareholder resolutions as a last resort in the process of shareholder engagement. We believe investors should only resort to filing a proposal when material financial issues are at risk, and when other forms of engagement and dialogue have reached an impasse.

But the DOL’s recent proposals seem to imply that ESG issues do not, in fact, have financial implications and ESG-related shareholder resolutions do not merit a vote by plan fiduciaries. We could not disagree more strongly with this sentiment.

Beyond this, we point to the comment letter regarding the DOL ESG integration proposal from our partners at the American Benefits Council who have thoughtfully laid out reservations around the rushed nature of these processes and the potentially costly unintended consequences of these regulatory changes.

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