Labor Department ends enforcement of Trump administration ESG rule

ESG developments this week

In Washington, D.C.

Labor Department ends enforcement of Trump administration ESG rule 

On March 10, the Biden administration announced that it will not enforce a Trump administration Department of Labor rule warning asset managers about their fiduciary responsibilities under ERISA (The Employee Retirement Income Security Act of 1974), specifically concerning ESG-related investment vehicles. 

The rule, DOL Regulation, §2550.404a-1, reminded retirement plan managers that their fiduciary responsibilities included ensuring that retirement investment fund decisions be made exclusively on pecuniary factors. 

Asset managers argued that the rule was unnecessary and would, in their view, punish those saving for retirement: 

“There was not a real rationale for that rule in the first place, says Aron Szapiro, head of policy research for Morningstar, an investment research firm. In fact, he said it was the opposite of what many investors want: Sustainable investments have been increasingly popular every year outside of workplace retirement plans. Precluding them from 401(k)s and other retirement accounts doesn’t make sense.

“This is basically a good news story for investors,” says Szapiro. It’s actually beneficial for long-term investors when companies take climate change and other issues into consideration, he adds.

Not only did investors put a record $51 billion into sustainable investments in 2020, Morningstar found in a recent analysis, but funds that take ESG factors into consideration have actually out-performed other conventional funds, on average. There is no real conflict between good investment returns and promoting ESG practices, Szapiro says.”

Trump administration Labor officials, however, argued that the rule was worded to avoid casting aspersions on ESG funds and their managers, and intended to protect future retirees and their investments. 

Patrick Pizzella, a former Deputy Secretary of Labor under President Trump, told the Wall Street Journal that the statement announcing the end of the rule’s enforcement “listed a wide variety of stakeholders they heard from—but not among their list was a single beneficiary or plan participant….And that is who these final rules are looking out for.”

On Wall Street and in the private sector   

Investors managing $33 trillion create new ESG investment standards

On March 10, a group of investment managers announced that they had created new ESG investment standards and a new framework by which to judge and adjust corporate behavior. The group, which calls itself the Institutional Investors Group on Climate Change, announced its plans, its participants, and its expectations. The broader effort in which this framework was released, which is led by the environmental advocacy group Ceres, is titled The Paris Aligned Investment Initiative. According to participants, as reported in Bloomberg, the Initiative will aim to leverage its $33 trillion-plus combined assets to advocate global corporations be better environmental stewards:

“The idea is to come up with a common approach to decarbonize investor portfolios and the wider economy, and thereby contribute to keeping global warming below 1.5 degrees Celsius, the more ambitious target of the Paris climate accord….

“It is easy to make a long-term commitment to be net-zero, but the key question is the path you take to achieve it,” Adam Matthews, chief responsible investment officer at the Church of England Pensions Board, said in the statement. A practical and credible framework for getting to net-zero “is a vital part of the investment architecture that was missing,” he said….

“Decarbonising our portfolio alone isn’t enough,” said Barry O’Dwyer, chief executive officer of Royal London Group. “As institutional investors, we must influence the companies we invest in to reduce their emissions and invest in the solutions that will help us realize the goals of the Paris Agreement.””

This pledge follows similar, recent pledges from other large banks and asset management firms, including Goldman Sachs and Citigroup.

Investment banking firm assigning ESG scores to companies

On March 8, the investment banking firm Cowen announced that its research arm had begun assigning ESG scores to all of the companies it covers. Cowen announced that it had also developed its own matrices and will be providing them henceforth to analysts and customers alike. Reuters reported the following:

“Cowen said it would use technology and data from third-party ESG specialist Truvalue Labs, which deploys artificial intelligence to assess more than 100,000 sources of information that can help give a steer on potential issues and controversies in real time.The score would be presented to clients on a scale of 1 to 100, with 50 being neutral, and above being positive.

“ESG factors have become a critical component of the investment process and there is a distinct need to have a solution set that can address the volume of information involved and standardisation needed to have a clear view of corporate progress,” Robert Fagin, Cowen’s Director of Research said in a statement.

The scores would be made available to Cowen’s team of 55 analysts from Monday, with coverage expected for all the companies it analyses, except those for which sufficient ESG data is not available.”

CFA Institute offering new ESG certification

On March 15, the CFA Institute, which provides the Chartered Financial Analyst designationconsidered a gold standard among investment professionalsbegan offering a new ESG certification:

“The CFA Institute’s ESG certificate, which was initially developed by the CFA Society of the UK, will be available globally starting on Monday. It requires candidates to complete 130 hours of self-directed study and pass an exam lasting two hours and 20 minutes….

Margaret Franklin, president and chief executive of the CFA Institute, sees an increasing focus on ESG as an important part of that plan. There is an “astronomical gap” between the soaring demand for sustainable investment products and the limited number of people with the expertise needed to create them, she told the Financial Times.

“The nature of portfolio management is changing, and so the real strategy is to make sure that we have those learnings available for the investment professional,” she said.”

In the spotlight

ESG-related debt instruments continue growth

In our February 23 edition, we reported that Anheuser-Busch, the brewers of Budweiser, announced its deal to participate in the world’s largest-ever ESG-related debt facility. The revolving-debt loan—which will total $10.1 billion—will be tied to the company’s performance on ESG factors.

In an article also published last month, the environmental-financial journalist Heather Clancy reported that similar ESG debt instruments are growing increasingly mainstream and popular. Clancy noted the following:

“In early February, the U.S. arm of Japanese tire company Bridgestone disclosed that it had signed a $1.1 billion credit facility with Tokyo-based global bank SMBC with interest rates pegged to the ESG risk scores it earns from ratings organizations Sustainalytics and FTSE Russell. The better its ESG scores, the less interest it will pay on the borrowed money. The opposite is also true: If the company blows one or more of its ESG goals or slips in a rating, that loan will be more expensive.

The arrangement, touted as one of the first of its kind for the U.S. tire industry, is known as a sustainability-linked loan (SLL). This sort of financial instrument first emerged in 2017, and volumes grew 150 percent between 2018 and 2019 — with more than $137 billion in borrowing driven by SLLs during 2019, according to research by law firm Skadden. And although the first half of 2020 slowed along with the economic shock of the COVID-19 pandemic, the borrowing volume through October of last year was still 29 percent higher than for all of 2018….

Bridgestone has certain targets in place for both Sustainalytics and FTSE Russell. For example, if Bridgestone’s ESG risk drops to “Negligible” (the lowest possible level and the best rating that Sustainalytics catalogs), it will realize a better credit rate. (As of this writing, Bridgestone is at the risk level one step above.) Its cost of borrowing will be lowest if it meets the goals for both Sustainalytics and FTSE Russell, [Jose] Anes [vice president and corporate treasurer of Bridgestone Americas] said. “On the other side, if our scores get worse, we have skin in the game.”

Bridgestone’s sustainability goals include a commitment to become carbon neutral by 2050, alongside a midterm goal to reduce its CO2 emissions by 50 percent by 2030 compared with 2011 levels. It’s also pledging to use “100 percent sustainable materials” by 2050, with an interim goal of 40 percent of its materials coming from renewable or recycled resources.”

The article also notes that the majority of these debt arrangementsincluding the one entered into by Anheuser-Busch InBev SA/NVare fashioned in Europe. Nevertheless, the practice is increasing in the United States as well.

Notable quotes

“The transformation of the energy sector or the industrial sector will require massive amounts of investment. The investors have shifted their focus from risk analysis to [thinking] ‘wow, this is potentially the largest investment opportunity of our lifetime. How do we participate in this very large shift in the global economy?’”