Last week, the House Committee on Ways and Means held a hearing entitled "Ensuring that 'Woke' Doesn't Leave Americans Broke: Protecting Seniors and Savers from ESG Activism." Witnesses for the roughly four-hour hearing included:
- Preston Rutledge, former assistant secretary of labor at the DOL's Employee Benefits Security Administration during the Trump administration;
- Jason Isaac, former State Representative in the Texas House of Representatives and Director of Life:Powered, a national initiative of the Texas Public Policy Foundation;
- Marlo Oaks, State Treasurer of Utah;
- Mason Bolay, Senior Vice President of First Bank & Trust Company; and
- Brandon Rees, Deputy Director of the AFL-CIO's Office of Investment.
Like prior congressional hearings on the topic of ESG this year (see our prior coverage here, here, here and here), and as its name implies, this latest one reiterated how House Republicans remain steadfast in their mission to minimize (or, in the views of some, to outright ban) the use of ESG considerations by asset managers in retirement plan investing. This is their position notwithstanding the fact that doing so is permissible under the Biden administration's 2022 final rule pursuant to ERISA, so long as these factors appropriately reflect a plan fiduciary's reasonable assessment of their impact on financial risk and return.
The Republican committee members asserted that using ESG factors contravenes retirement plan fiduciaries' duties of prudence and loyalty and their obligation to act for the exclusive benefit of plan participants and beneficiaries. To justify their position, House Republicans highlighted studies that showed ESG funds underperforming relative to other investments (contrasting with Democrat-identified studies coming to the opposite conclusion), indicating that ESG investing conflicts with the fiduciary duty to maximize profits/returns on behalf of plan participants.
In his opening statement, Committee Chairman Jason Smith (R-MO) noted that, according to his staff's analysis of the top 20 ESG investment funds, ESG funds performed 18 percentage points worse than the stock market as a whole over the past year. Moreover, he cited a 2020 study that found pension funds with an ESG orientation lagged those of non-ESG funds by two basis points per year over a ten-year period. As he summed up, "requiring retirement plan managers to invest in ESG funds is reckless and a danger to the system we have the responsibility to protect as members of the Ways & Means Committee."
The Democratic members of the Committee expressed their view that ESG is not the cause of what they characterized as the ongoing retirement savings crisis that is affecting millions of American workers and their families. According to the Democrats, the Committee should be focusing on what they view as more urgent issues such as funding the federal government for fiscal year 2024 and reforming the Social Security program. Rep. Richard Neal (D-MA), who is the Committee's ranking Democrat and former chairman, observed that retirement policy typically serves as a bipartisan issue, but he contended that the ESG issue is another "manufactured crisis meant to distract the base from the lack of legislating."
Given the divisive tone of the hearing, it was Mr. Rutledge's testimony that stood out as he tried to remove himself from the politics, and instead remind the Committee of how in his opinion the DOL has remained consistent in its views over the years.
As his written testimony notes, "[t]he Department of Labor has grappled with issues related to retirement plan investment and collateral benefits throughout the nearly five decades of ERISA. The form of guidance and nuances, as well as preamble language and emphasis, have varied across the years and administrations, but the fundamental principle has remained. The north star of ERISA, embodied in the statutory text, is that fiduciaries must discharge their duties with respect to a plan solely in the interest of, and for the exclusive purpose of providing benefits to, the participants and their beneficiaries. The interest of participants and beneficiaries in their retirement income must remain the overriding concern of ERISA plan fiduciaries."
Upon questioning, Mr. Rutledge reiterated that the focus should be on maximizing investment performance, regardless of the label of the fund. Furthermore, this principles-based approach, according to Mr. Rutledge, does leave room for pursuing ESG investment strategies if it maximizes returns.
With Republican elected officials at both the state and federal levels continuing to shine the spotlight on the use of ESG factors in retirement plan investing, more than ever, it is critical for asset managers to be meticulous and diligent about their use of ESG (if any) in their fund documents and marketing materials, to make it clear how these factors (to the extent they are considered) fit into the overarching investment thesis and how they relate back to financial risk and return.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
