Under the new rule, material ESG factors intended to improve returns or manage risks consistent with the plan’s investment goals and objectives are considered prudent and appropriate for ERISA plans.
While Natixis Investment Managers views this as a step in the right direction, we believe subsequent rulings should provide a regulatory framework that recognizes the important role ESG integration can play in providing retirement plan options for plan participants.
Natixis Investment Managers Recommendations
We recently urged the DOL to consider five critical points to make it clear that prudently-selected Environmental, Social, and Governance (ESG) investments are appropriate for ERISA plans.
- Revise the Current Rule, Don’t Suspend or Rescind It
While suspending enforcement of the final regulation was a good start, we have seen firsthand the rule’s effect on appropriate ESG investments in retirement plans. We believe the 2020 rule created a false perception among too many ERISA plan fiduciaries that ESG-related investments create additional fiduciary risk, which we believe is inaccurate. We believe clear regulatory standards upholding the propriety of appropriate ESG-related investments are necessary to help plan fiduciaries get past the confusion and false perceptions accompanying the 2020 rule.
- Eliminate the “Pecuniary” Test
We urge the DOL to drop the “pecuniary” test entirely, as we believe the new standard is confusing, unnecessary, and inconsistent with ERISA’s legal history. We do not believe new terms were ever necessary to capture a fiduciary’s duty to act solely in the interest of plan participants and beneficiaries. Further, we do not believe ESG investing presents any new or different issues for ERISA fiduciaries to understand, compared to the fundamental changes in financial markets and products they have successfully addressed since 1974.
- Acknowledge that Integrating ESG Factors1 is a Generally Accepted Investment Theory
The concerns that shaped the “pecuniary” test were based on the idea that ESG-related investments are somehow riskier or less appropriate than other investments. That concern has been thoroughly dispelled by many financial professionals.
- Coordinate with Other Agencies to Develop New Reporting Standards
Other Federal agencies are already taking action to standardize ESG-related information. We urge the DOL to coordinate with the SEC and the Treasury Department with regard to improving the financial reporting of public companies. These new regulations will further standardize and clarify ESG analysis, providing a better framework for plan fiduciaries to assess ESG-related factors when making investment decisions.
- Qualified Default Investment Alternative (QDIA) Investments Do Not Present Unique Issues
Finally, we don’t believe that integrating ESG factors into QDIA investments warrants different treatment than any other plan investment. Considering ESG factors during the investment process with the aim of better managing risk and improving risk-adjusted returns under generally accepted investment theories is not about political values or judgments. It’s a strategy for seeking economic value for a plan participant’s retirement.
Plans can select ESG-related investments now, as long as they can pass the plan sponsor’s investment screening process. Many investment managers are using ESG factors as additional tools for diversifying investments, managing risks and potentially increasing returns.
1 Not all investment managers integrate ESG considerations into decision-making to the same extent. Investors should review offering documents before investing in any strategy to fully understand the ESG integration practices used by that investment manager.
This material is intended for informational purposes only, does not constitute investment advice and should not be construed as a recommendation for investment action. The information provided does not take into account the investment objectives, risk tolerance, restrictions, liquidity needs or other characteristics of any one particular investor.
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