End of Week Notes
Global ESG fund assets top $1 trillion/ Strong opposition to proposal limiting ESG in retirement plans
Plus DOL investigators are requiring ESG plan advisors to turn over their records
My colleagues and I published our second quarterly Global Sustainable Fund Flows report last week. Some takeaways:
- Sustainable funds rebounded strongly after the coronavirus pandemic market sell-off. Supported by the stock market recovery and growing investor interest in ESG issues, global inflows into sustainable funds were up 72% in the second quarter of 2020 to USD 71.1 billion.
- Europe continued to dominate the space, garnering about 85% of the global inflows, while the United States took in about 15%. Fund flows in the rest of the world were considerably lower by comparison, clocking in at only USD 0.26 billion for Canada, Australia and New Zealand combined, while Asia reported outflows.
- Assets in sustainable funds hit a record high of USD 1.1 trillion as of the end of June, up 23% from the previous quarter.
- Product development in the second quarter of 2020 stood strong, with 125 new fund offerings. The rate of new offerings has been holding steady for the last five quarters. Asset managers also continued to repurpose and rebrand conventional funds into sustainable funds, with 40 such funds in Europe and three in the U.S.
I would just add that there is room for tremendous growth in the United States. For the first half, flows into sustainable funds reached $20.9 billion, close to the all-time high set (over 12 months) in 2019. With July flows just in at an estimated $3.2 billion, sustainable funds in the U.S. have drawn a record $24.1 billion so far this year.
Get your copy of the Global Sustainable Fund Flows Q2 report here:
Comments on proposed DOL rule overwhelmingly negative
At a time when investors the world over, including the United States, are embracing sustainable investing, Trump Administration regulators are doing their best to throw up roadblocks. The latest attempt comes from the Department of Labor, which is trying to keep ESG investments out of pension plans regulated under ERISA. That means worker retirement assets worth around $10 trillion could be precluded from considering ESG in their investments. The rule would apply to both traditional pension plans and defined-contribution plans.
And for some reason (what could it be?), Trump’s DOL is trying to rush this rule through. Normally, a rulemaking process allows a 60-to-90 day comment period, especially for regulations that will have far-reaching effects. For this one, however, the comment period was 30 days in the middle of the summer. An agency must carefully consider the comments it receives (in this case more than 8,000), including pertinent evidence (such as published research) and take these into account before finalizing a rule. So the DOL is going to have a lot of work to do in the mercifully short time remaining for this administration (OK, my fingers are crossed).
You can peruse the comments here, but the vast majority are opposed to the rule. Notably, many large conventional asset managers weighed in opposed to the rule, including BlackRock, Vanguard, State Street Global Advisors, Fidelity, T.Rowe Price, and Putnam.
Most of the relatively few comments in support of the proposed rule came from conservative groups and trade organizations like the American Conservative Union, American Legislative Exchange Council, Competitive Enterprise Institute, and the National Association of Manufacturers.
It would be a travesty for the DOL to ignore the near-consensus views of the investment industry in favor of those of a small group of ideologues to keep American workers’ retirement funds from being able to consider climate and other well-documented material ESG risks and opportunities.
But that’s where we are in Trump’s America.
EBSA requests mountains of ESG information from advisors
Actually, this is where we are in Trump’s America:
Reports have been coming in that “Investigators” from the DOL’s Employee Benefits Security Administration (EBSA), which oversees ERISA plans, have been sending ominous letters to retirement plan advisors asking for detailed information about their use of ESG.
I don’t know how widespread these efforts have been, but here are excerpts from the letter that was forwarded to me:
ERISA mandates that plan fiduciaries discharge their duties “solely in the interest” and “for the exclusive purpose” of providing benefits to participants and their beneficiaries.
Based on information available to EBSA, it appears that you offer environmental, social, and governance (ESG) themed investment services and/or funds to ERISA covered plans and/or entities holding plan assets (ERISA Clients). Accordingly, the Department seeks to better understand your criteria, as a fiduciary, for ESG themed investing and compliance with your duty to administer plan assets prudently and for the exclusive purpose of providing benefits to participants and beneficiaries, and defraying reasonable expenses of administration. To that end, EBSA requests the following information from you.
This letter, dated July 28, 2020, asked for the following information by no later than August 12, 2020, covering the more than five-year period from January 1, 2015 to present:
1. Documents sufficient to identify any ERISA Clients;
2. Documents sufficient to identify and describe any ESG factors and/or strategies used in providing services to ERISA Clients;
3. All investment policies or guidelines concerning the use of ESG factors in developing investment strategies, selecting investments, or monitoring the performance thereof for ERISA Clients;
4. Any policies or guidelines relating to your compliance with the principles set forth in previous applicable guidance relating to fiduciaries’ consideration of ESG factors in investment decisions during the relevant period;
5. All documents relating to your use or consideration of ESG factors in connection with investment services and options for ERISA Clients, including developing investment strategies, selecting investment options and monitoring performance;
6. Documents sufficient to identify any ERISA Client investment strategies, holdings or transactions which were based in whole or part on the consideration of ESG factors;
7. Asset listings or portfolio statements for any ERISA Client whose investment holdings are in whole or part based on the consideration of ESG factors;
8. For each strategy or investment which was recommended or selected for ERISA Clients based in whole or part on the consideration of ESG factors: i. Any documents reflecting calculations or disclosures of gains or losses; ii. All reports or summaries of performance or returns; iii. All financial statements or audits; iv. All documents that evidence due diligence prior to investment; and v. All disclosures, marketing materials, communications or other documents describing operations, objectives, investment strategies and risks, management, expenses, valuation, benchmarks or performance provided to ERISA Clients.
9. Documents sufficient to show the names, addresses, and responsibilities of all persons or entities with responsibility for making investment decisions, or providing investment advisory or consulting services that take into account ESG factors;
10. Records relied upon to meet a statutory, class or individual prohibited transaction exemption for party in interest transactions with ERISA Clients related to strategies or investments based in whole or in part on the consideration of ESG factors.
All this information going back five-plus years had to be provided within two weeks in August. (Documents, by the way, include all emails.)
One might think that such an aggressive approach for gathering information would reflect widespread and urgent concerns about violations of fiduciary duty among those who have used ESG in a retirement plan. But there are no widepread or urgent concerns outside of those of the right-wing Washington swamp of ideologues and trade organizations, which is trying its best to tick items off its agenda before November.
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