Daily Capital

Weekly Market Digest: Exploring the Proposed DOL Rule for ESG in Retirement Plans

Global stocks waffled throughout the week as investors continued to assess the pandemic and its impact on the economic recovery. Cases are surging in many states across the U.S., with rising numbers in Asia and other regions. But at the end of the week investors shrugged it all off, pushing stocks to another weekly gain. Emerging market equities performed particularly well, driven in large part by China’s rally.

Weekly Returns

S&P 500: 3,185 (+1.8%)
FTSE All-World ex-US (VEU): (+1.8%)
US 10 Year Treasury Yield: 0.65% (-0.02%)
Gold: $1,798 (+1.3%)
EUR/USD: $1.130 (+0.5%)

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Major Events

  • Monday – Uber announced it will buy Postmates for approximately $2.65 billion.
  • Tuesday – The Chinese maker of TikTok, a popular social media app, announced it would pull out of Hong Kong over concerns around the new national security law imposed by China.
  • Wednesday – The Ivy League cancelled sports for the upcoming semester due to risks surrounding COVID-19.
  • Thursday – The US Supreme Court ruled to allow a New York prosecutor access to Trump’s tax records, while denying access to Congress.
  • Thursday – Florida reported record high COVID-19 deaths and hospitalizations, as infections continued to surge in many states across the country.
  • Thursday – Jobless claims fell to 1.3 million over the previous week, coming in better than expected and continuing their gradual decline.
  • Friday – In a staff memo, Amazon instructed employees to remove the TikTok app from mobile devices that were connected to the firm’s email system.

Our Take

Let’s take a break from coronavirus news and cover an issue that seemed to slip under the radar in recent weeks. In late June, the Department of Labor issued a proposed new rule regarding ESG investing in retirement plans. Specifically, the release stated the following:

ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives. Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan. Rather, ERISA plans should be managed with unwavering focus on a single, very important social goal: providing for the retirement security of American workers.

Let’s start with what the new proposed rule gets right: Secretary of Labor Eugene Scalia’s comment that the primary goal of ERISA plans is to provide for the retirement security of American workers. This is absolutely on point and is exactly what retirement plans should be designed to do.

Here’s where we feel it goes wrong: it shows a complete misunderstanding of ESG investing. Anyone with basic knowledge of ESG knows it is not simply a way to pursue social or environmental goals at the expense of long-term returns. Quite the opposite. Environmental, social and governance issues are financially material to a company’s bottom line. To say that climate change won’t have an economic impact on certain companies and industries is simply naïve. Just look at what happened to PG&E.

In fact, numerous third-party studies have shown that companies better managing ESG issues tend to be more profitable, produce stronger financial results, and can actually lead to better investment returns over time. This is why in 2015 the DOL specifically approved the use of ESG investments by ERISA plan fiduciaries, citing its potential economic and financial impact. This new proposed rule would essentially reverse that decision.

To be clear, it’s worth pointing out the rule does not explicitly prohibit ESG funds from being offered in retirement accounts. But it does suggest that a plan fiduciary may be subject to intense scrutiny if they decide to include them. That alone would likely scare away many plans from ESG investments entirely, even if those investments are potentially superior to existing offerings.

If approved, this rule would be a major blow to ESG investing. And as ironic and unfortunate as it sounds, it could end up negatively impacting the retirement security of American workers.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Brendan Erne, CFA
Brendan Erne serves as the Director of Portfolio Implementation at Personal Capital. He has over 15 years of industry experience, spanning almost all levels of the investment process, including several years at Fisher Investments as an equity analyst covering the Technology and Telecommunications sectors. He also co-authored Fisher Investments on Technology, published by John Wiley & Sons. Brendan is a CFA charterholder.

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