by Rupert Darwall
Rising inflation threatens the value of Americans’ retirement savings. Now the Biden administration is finalizing a rule to loosen safeguards under the Employee Retirement Income Security Act of 1974 (“ERISA”) that protect private retirement savings. The new rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” stems from President Biden’s May 20, 2021, Executive Order on Climate-Related Financial Risk, which directed senior White House advisers to develop a strategy for financing the administration’s net-zero climate goals, including the use of private savings.
Predictably, Wall Street is cheering the prospect of undoing ERISA safeguards. According to one analysis, 97% of comment letters support the proposal. But as I show in my RealClear Foundation report The Biden Administration’s ERISA Work-Around, it’s the remaining three percent that should give the Department of Labor (DOL) cause to rethink its deeply flawed approach.
Under ERISA, retirement savings must be invested for the exclusive purpose of providing retirement benefits. The May 2021 executive order illustrates the very danger that ERISA’s exclusive-purpose rule is designed to guard against. To achieve the goals set out in the order, DOL is instructed to “suspend, revise or rescind” two Trump-era rules designed to uphold ERISA’s exclusive-purpose rule.
The stratagem adopted by DOL to carry this out is breathtaking in its audacity. The effect of the rule—if finalized as proposed—is to embed ESG investing in retirement plans and nullify the clear, unambiguous intent of ERISA’s exclusive-purpose rule. It’s audacious—and it’s high risk. In December, GOP senators Pat Toomey, Mike Crapo, Richard Burr, and Tim Scott warned the Secretary of Labor, Martin Walsh, against the proposed rule’s use of “inchoate” ESG terminology and reminded him that in 2020, DOL had been convinced by its review of public comments that the term is “not a clear or helpful lexicon for a regulatory standard.”
ESG—environmental, social, and governance—investing embodies two incompatible propositions. The first is that investing should be about more than financial returns and have regard to wider societal concerns. In a January 2022 interview with Barron’s, Amy Domini, who cofounded KLD Research & Analytics in 1984, objected to rules that require investing based solely on economic value. “We have got to get rid of this concept of economic value,” Domini told Barron’s. “I don’t care if I’ve got an extra 50 bucks in my pocket if it’s dangerous to walk down the sidewalk, or if my grandson has leukemia because the water system is so polluted.”
The second ESG proposition contradicts the first. Far from sacrificing financial returns, ESG investing boosts them. “Our investment conviction,” BlackRock states in its comment letter to DOL, “is that incorporating sustainability-related factors—which are often characterized and grouped into ESG categories—can provide better risk-adjusted returns to investors over the long-term” (emphasis added).
BlackRock’s corporate strategy is to market ESG-style investment products to millennials, who, BlackRock believes, are less interested in financial returns than boomers. In his 2019 letter to CEOs, BlackRock CEO Larry Fink cited a survey of millennials. When asked what the primary purpose of businesses should be, 63% more said “improving society” than said “generating profit.” Three years later, in his 2022 letter to CEOs, Fink was pivoting away from ESG and undercutting BlackRock’s special pleading to DOL. “Make no mistake,” Fink wrote, “the fair pursuit of profit is still what animates markets; and long-term profitability is the measure by which markets will ultimately determine your company’s success.”
According to Jonathan Berry, DOL’s former Acting Assistant Secretary for Policy under the previous administration, career staff at DOL’s Employee Benefits Security Administration (EBSA) initiated secretive private meetings after the November 2020 election to build support and find cause to overturn the 2020 rules. Who were these parties? In its comment letter on the proposed rule, BlackRock lets the cat out of the bag in praising DOL for its “thoughtful analysis of the challenges presented by the 2020 rules” and for incorporating feedback from a “wide range of stakeholders.”
The outcome was a DOL press release on March 10, 2021, announcing the nonenforcement of the two 2020 rules. “These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments,” said Ali Khawar, EBSA Principal Deputy Assistant Secretary. In fact, references to ESG had been removed from the text of the 2020 Financial Factors rule. Far from ruling out consideration of any ESG factor, its preamble accepted that “ESG considerations may present issues of material business risk or opportunities.” Why hasn’t DOL issued a FAQ and held a public meeting to dispel misperceptions about the 2020 rule? Because the White House has instructed DOL to nix the rule.
The proposal also seeks to rewrite the December 2020 DOL rule on proxy voting in order to push fiduciaries to outsource their voting to the proxy-advisory duopoly of Institutional Shareholder Services and Glass, Lewis and their bias in support of ESG-type goals in proxy votes. Furthermore, the proposed replacement rule doesn’t tackle the vexed issue of “empty voting,” when, for example, the likes of three big index-tracker providers vote proxies in respect of shares that they don’t have an economic interest in. Shouldn’t DOL be clarifying that ERISA fiduciaries have a duty to investigate the voting policies of firms to which they delegate voting authority?, asks RealClear Foundation senior fellow Bernard Sharfman and Manhattan Institute’s James Copland. Failure to do so, they suggest, could constitute grounds for a legal challenge under the Administrative Procedure Act.
In their letter to Secretary Walsh, the four GOP senators also invoke the specter of the rule having its fate decided by the courts. “The use of such [ESG] terminology in the proposal is arbitrary and capricious under the Administrative Procedure Act,” the senators warn. As drafted, the proposed rule would invert the primacy of statute law over executive-agency rulemaking. It would also fundamentally alter the nature of American capitalism, corralling capital for political ends, enabled by multitrillion-dollar investment advisers eyeing the prospect of higher fees.
Will the rule of law prevail?
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Rupert Darwall is the author of Capitalism, Socialism and ESG. This article is drawn from a RealClear Briefing available here. Darwall is a senior fellow at RealClearFoundation, researching issues from international climate agreements to the integration of environmental, social, and governance (ESG) goals in corporate governance. He has also written extensively for publications on both sides of the Atlantic, including The Spectator, Wall Street Journal, National Review, and Daily Telegraph.
Photo “Joe Biden” by Gage Skidmore. CC BY-SA 2.0.