Economy and Society: Pushback against proposed Labor Department ESG rules


Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

In Washington, D.C.

Republican pushback against proposed ESG rules 

In response to the recent Labor Department introduction of a proposed rule that would give retirement-plan managers regulated by ERISA (the Employee Retirement Security Act) greater leeway in using ESG principles in their investment decisions (repudiating the Trump Administration’s plan to insulate retirement savings from investments that it saw as politically motivated and potentially risky), Republicans decided to delay the confirmation process for Biden’s nominee to head the Labor Department’s Employee Benefit Security Administration, Lisa Gomez. According to Bloomberg Law:

“Republican lawmakers’ opposition to a Biden administration proposal to favor environmentally conscious retirement funds is delaying Senate action on President Joe Biden‘s pick to oversee private-sector employee benefits.

GOP members of the committee considering Lisa Gomez’s nomination to run the U.S. Department of Labor’s benefits arm want answers to questions they’ve submitted to her and to the administration about the new rulemaking on the use of environmental, social, and corporate governance factors in retirement portfolios, a senior Republican staffer on the panel told Bloomberg Law.

Sen. Patty Murray (D-Wash.), who chairs the Health, Education, Labor, and Pensions Committee, agreed to a request from Republican senators to delay a vote on Gomez’s nomination, according to the staffer, who requested anonymity because they didn’t have authorization to speak to the media. The extra time will allow Gomez to respond to questions about her ideas on ESG funds.

Gomez, who testified before Murray’s panel on Oct. 7, was omitted from a package of eight nominees who are scheduled to receive a committee vote Oct. 26. That group includes another nominee for DOL who received a joint confirmation hearing alongside Gomez.

A week after that hearing, the agency Gomez is picked to lead, the Employee Benefits Security Administration, released a proposed rule that would allow investors of workplace retirement funds to focus on environmentally friendly investments and cash in on companies combating climate change.”

Proposed rule aims to bring transparency to clients

Last month, the SEC proposed a new rule on “Enhanced Proxy Voting Disclosure by Investment Funds,” which is intended to make proxy voting decisions made by plan officials more transparent to their clients:

“The Securities and Exchange Commission today proposed amendments to Form N-PX to enhance the information mutual funds, exchange-traded funds, and certain other funds report about their proxy votes. The proposed rulemaking would require funds to tie the description of each voting matter to the issuer’s form of proxy and to categorize each matter by type to help investors identify votes of interest and compare voting records. The proposal also would prescribe how funds organize their reports and require them to use a structured data language to make the filings easier to analyze. Funds would also be required to disclose how their securities lending activity impacted their voting.

Further, the rulemaking would require institutional investment managers to disclose how they voted on executive compensation, or so-called “say-on-pay” matters, which would fulfill one of the remaining rulemaking mandates under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Managers generally would be subject to the same Form N-PX reporting requirements as funds with respect to their say-on-pay votes.

“This proposal will make it easier and more efficient for investors to get crucial information about proxy votes from funds,” said SEC Chair Gary Gensler. “I am pleased to support the staff’s recommendations and look forward to putting them out to public comment.””

Retirement fund managers who are enthusiastic about their new freedom to invest their clients’ money in ESG products will have to demonstrate, on an ongoing basis, if that enthusiasm is motivated by purely pecuniary interests or if it is simply the means by which they are attempting to leverage their clients’ retirement resources to advance their own political agendasa key question among ESG opponents who have suggested that this is precisely what ESG managers do. 

On Wall Street and in the private sector

BlackRock encourages SEC to mandate ESG-related disclosures for private companies

According to The Wall Street Journal, BlackRockthe largest asset management firm in the worldand others are trying to persuade the SEC to get involved in forcing privately held companies to embrace sustainability and other ESG practices:

“It’s not enough for socially enlightened masters of finance like BlackRock and Nasdaq to push around publicly traded companies. Now they want the Securities and Exchange Commission to impose their social and political agenda on all companies, including private firms.

The SEC is expected soon to propose rules requiring companies to publicly disclose climate, board diversity and human-capital metrics. Large asset managers and government pension funds have found mixed success pressuring public companies to adopt these disclosures, which is why they are now endorsing government coercion….

Nasdaq CEO Adena Friedman wrote in these pages in February that the exchange’s board diversity rules would help “create momentum toward an approach to capitalism that offers more opportunity to more people” and show this “can be accomplished through a market-driven solution—rather than government intervention.” Now she’s supporting government intervention.

“Were the SEC to consider [board diversity] at more of a regulatory level, we would also hope that they would consider private and public companies,” she told the Council of Institutional Investors last month. “We do think at the end of the day every company should have diversity as part of their consideration, and only the SEC has the ability to establish standards at the private company level. So I think that would be an interesting way for them to expand it very significantly.” Yes, it sure would….

BlackRock wrote in an SEC public comment that “we encourage the SEC to explore its existing regulatory authority to mandate climate-related disclosures with respect to large private market issuers” in order “to avoid regulatory arbitrage.” The Investment Company Institute, which represents large asset managers, echoed its sentiments.

Ms. Friedman, Mr. Fink and friends no doubt recognize that burdensome ESG mandates, which also carry substantial litigation and reputational risks, will cause many companies to shun public markets. This would hurt stock exchanges and asset managers, but most of all retail investors. So now they want to foist their ESG regime on private companies too.”

In the February 16 edition of this newsletter, it was reported that Larry Fink, the CEO of BlackRock, specifically asked the government to stay out of the ESG business and to focus its energies on privately held companies:

BlackRock CEO Larry Fink, who has been hailed by some as a corporate leader in fighting climate change, is putting his weight behind a call for companies to abide by a voluntary global standard instead and is warning against the potential shortfalls of government intervention….

BlackRock’s Fink argues that many publicly traded companies — those accustomed to sharing information widely with investors — are on track to manage their climate risk amid growing market pressure. He says the government should focus on privately held firms that are taking on more carbon-intensive businesses but don’t divulge as many details of their operations….

“We’re going to see a vast change in the public company arena worldwide,” he said at a Brookings Institution event Tuesday. “They are going to move forward. We’re not going to need really governmental change or regulatory change.”

In the spotlight

Harvard’s ESG-focused endowment investment lags S&P 500

Harvard University’s endowment, which is run by Harvard Management Corporation, one of the first management companies to make the case that ESG investment would enhance returns, appears to be starting in a hole. Now that the Federal Reserve has promised to begin tapering its stimulus and even to consider raising rates, the ability of funds to do well by doing good is likely to be tested:

“What investing lessons can be learned from Harvard University’s failure to beat the S&P 500 SPX, 0.57% in its latest reporting period?

It’s a timely question, given the university’s report of its endowment’s investment return in the fiscal year that ended Jun. 30. That return was a gain of 33.6% — 7.3 percentage points lower than the S&P 500’s total return.

Lagging the stock market is nothing new for Harvard; the endowment has done so more often than not in recent years. Cumulatively over the past decade it has lagged the S&P 500 by 5.6 annualized percentage points.”

HMC insists that its lagging performance is a result of what it describes as its conservative approach. Seven years ago, before ESG was all the rage in the investment world, HMC made a commitment to be on the cutting edge of the socially responsible investment movement:

“Harvard Management Corporation (HMC) signed up to the UN-supported Principles for Responsible Investment (PRI) less than a year ago, but the company that manages the $36 billion Harvard University endowment is already moving rapidly to build environmental, social and governance (ESG) factors into every investment decision it makes.

Jane Mendillo, president and chief executive of HMC, told the Fiduciary Investors Symposium at Harvard University that its embrace of ESG factors and the PRI was driven by the changing definition of what it means to be a fiduciary investor, and by a conviction that investing sustainably will improve its portfolio returns….

“We want to be forward-thinking. We want to be successful investors and sustainable investors. We are convinced that doing so will be good for our portfolio and for Harvard, and it will also be good for the world.”

Mendillo said that “over time, ESG factors will be considered in every part of the portfolio”.

“We know there is more we can do as managers to push our thinking about creating a truly sustainable portfolio for Harvard as we choose our investments and manage our risks going forward,” she said….

“Our goal, in pursuing all of our sustainable investment initiatives, in signing the PRI, in seeking more and better information on ESG risks, and on integrating ESG considerations into our investment process, is to reduce risk and to improve economic returns in an ever-evolving world – one where environmental, social and governance factors are becoming more prominent and more economically relevant, and certainly are not going away.””