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DoL proposal misses the mark on ESG

By Max Adams
30 Jul 2020

The US Department of Labour (DoL) has proposed what it characterises as a reiteration of what has always been required of retirement fiduciaries — that they act in the best interest of their beneficiaries — urging them to disregard ESG considerations in investment decisions. In doing so, it appears not to have noticed the last decade in financial markets, which has shown that ESG investing is very much in investors’ interests.

The proposal is not a malicious attack on socially responsible investing. Regulators need to regulate, and there is a tight window between now and November 3 when the US presidency could change hands. It is taking a side in a debate around ESG, which is that asset managers risk putting social goals ahead of returns to the detriment of investors.

The DoL admits the governance aspect of ESG is relevant but it restricts social and environmental factors as criteria for investment. But for years, institutional investors and researchers have pointed to strong risk adjusted returns in ESG compared to other assets.

In a 2018 report on default risk in project finance, Moody’s said “green use of proceeds project finance bank loans experienced a lower default rate than non-green project loans”. 

Meanwhile, in a study published in the first quarter of this year, BlackRock said, “we have observed better risk adjusted performance across sustainable products globally, with 94% of a globally representative selection of widely analysed sustainable indices outperforming their parent benchmarks”.

The reality is that ESG should not be thought of as virtue signalling among financial market players at the expense of their clients but should be considered in the full scope of evidence based outcomes for investors. 

The DoL should at least welcome a more thorough discussion of its proposal and extend the comment period before tries to resurrect the fossilised idea that ESG and financial performance don't mix.

By Max Adams
30 Jul 2020