Impact Blog
DOL guidance on ESG investments doesn't reflect market

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      By John StreurPresident and CEO, Calvert Research and Management and Monique PattilloCorporate Engagement Analyst & Proxy Specialist, Calvert Research and Management

      Washington - The US economy is all about "market based solutions," and the market is turning more and more to investments that consider ESG principles.

      Sustainable funds in the US set a record for flows in the first quarter of 2020 at $10.5 billion, despite the overall downturn in the market, and performed better than conventional funds over that period. The pandemic has been a clear illustration of a nonfinancial issue that quickly impacts asset values and income production across the global markets. Given this context, it's not surprising that we will likely see another record-setting year in terms of sustainable fund launches.1

      It was therefore disappointing when the Department of Labor (DOL) recently announced a proposal that would prevent Employee Retirement Income Security Act (ERISA) plan fiduciaries from investing in ESG vehicles, and requires fiduciaries to be wary of treating non-pecuniary factors, such as ESG factors, as economically relevant, unless they represented "economic risks or opportunities that a qualified investment professional would treat as material economic considerations under accepted investment theories." This may have the effect of imposing too great of a burden of proof on asset managers. It would create a significant burden on pecuniary ESG strategies surrounding disclosure, marketing strategies, performance metrics, and the like, relative to other investment strategies that are not identified as ESG.

      Far from reflecting where the markets are moving, this DOL guidance is a regressive approach that reflects outdated thinking on ESG investments — a superfluous "solution" to a problem that doesn't seem to exist. Existing rules already assert that fiduciaries cannot place non-pecuniary concerns above the financial best interest of plan participants, and the DOL has not cited any evidence that plan sponsors have actually violated this principle. Its concerns about ESG indicators in investment decisions lags the market understanding and is based on notions of ESG investing that are not supported by facts.

      The proposals fail to demonstrate that ESG investments increase risk or reduce returns, and do not acknowledge and distinguish pecuniary ESG benefits. It does not explain how the integration of ESG information into an investment analysis with the express purpose of improving returns is problematic if it also creates beneficial social or environmental outcomes, if such goals do not interfere with the pursuit of maximized returns at an optimal level of risk

      In fact, our own investment strategy is informed by a belief that that ESG offers unique benefits to investment analyses. Among the potential attributes: better insights into the intangible value of companies, anticipation of macro risks and proactively addressing systemic risks. In addition, our review of academic research shows that firms with strong ESG policies are likely to outperform peers with weaker performance.

      There are certainly changes that would increase the usefulness of ESG information in investment decisions. In particular, Calvert has long advocated for robust, standard ESG disclosures as one of the most effective ways to achieve improved risk/returns. We believe that the most effective way to achieve the pecuniary benefits of improved risk/returns is to support ongoing improvements in the quality of information available to investors, not discouraging fiduciaries from considering them in the first place.

      To read Calvert's full response to the DOL on the proposed amendments to ERISA, click here.

      Bottom line: Investors and asset managers are making it clear that sustainable investments are worthy of strong consideration. The DOL proposals are simply additional, unneeded regulation that represents a regression rather than a step forward.

      1 Jon Hale, "ESG Funds Setting a Record Pace for Launches in 2020," Morningstar, June 24, 2020. Accessible online at