U.S. push to further regulate ESG products in CAPs could hurt members

The U.S. Department of Labor is taking jabs at the inclusion of environmental, social and governance products in capital accumulation plans — and it could be to members’ detriment.

In late June, the Department of Labor proposed new rules around ESG products in retirement accounts. “The proposal is designed, in part, to make clear that . . . plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-financial objectives,” noted a release from the department.

However, a recent blog by Jennifer DeLong, head of defined contribution at AllianceBernstein, and Michelle Dunstan, the firm’s global head of responsible investing, said the regulations proposed could unnecessarily deter plan sponsors from offering ESG options.

Read: CFA Institute proposing industry standards for ESG disclosure

They noted the proposed rules aren’t a major shift from what’s already in place. “The new rules wouldn’t prohibit ESG options, but they could encumber the selection and monitoring process. For example, plan sponsors would need to do a lot more documenting to validate any ESG considerations on top of the current ‘all else being equal’ test. The rules would also all but preclude an ESG purpose-driven fund from serving as a qualified default investment alternative. We think these measures are overly restrictive, which could lead sponsors to turn away from funds with any hint of ESG.”

Notably, interest from both plan sponsors and members around ESG options is growing, said the blog. In its own research, AllianceBernstein found 67 per cent of plan sponsors said they’ve been asked about ESG options and 66 per cent said they felt ESG integration, in terms of applying ESG factors to fundamental investment analysis, is part of their fiduciary duty.

Read: Most Canadian institutional investors engaging in ESG issues: survey

However, with this interest comes confusion, noted Dunstan and DeLong. Almost half (42 per cent) of plan sponsors said their biggest obstacle around ESG is understanding the differences between the variety of ways they could offer it.

“Shunning all ESG would be unfortunate for participants because, as we see it, ESG considerations must be a critical component of in-depth fundamental research in any investment solution, whether it has an ESG label or not,” they said.