Economy and Society: Retiree advisers, AARP question Labor Department’s ESG proposal

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.

ESG Developments This Week

In Washington, D.C.

Predictions for the future of ESG

Late last month, as part of its end-of-the-year recap and start-of-the-year forecast, Roll Call provided a summary of the trends that it believes will drive ESG over the next several months. The paper singled out the Securities and Exchange Commission as the primary driver of ESG activity on the public/government side, and acknowledged that BlackRockthe world’s largest asset management firm, with almost $10 trillion in assets under managementwill drive events in the private sector:

“Activist shareholders may have the upper hand in holding companies more accountable on environment, social and governance issues next year, thanks to a combination of pressure from BlackRock Inc. and other institutional investors and proxy voting rule changes at the Securities and Exchange Commission.

BlackRock, the world’s largest asset manager, said this week it expects companies in which it invests to give more concrete details on climate-related risks and expand board diversity starting in 2022. In an update of its proxy voting rules, BlackRock said it will ask CEOs to explain how business strategies are resilient under “likely decarbonization pathways” and a scenario in which global warming is limited to 1.5 degrees Celsius.

Meanwhile, the SEC issued guidance and rules that will likely bolster activist, ESG-focused investors’ chances to get companies more focused on public policy issues and make it easier for shareholders to shake up corporate boards, as investment firm Engine No. 1 did in replacing three directors at Exxon Mobil Corp. in May….

BlackRock, which has about $9.5 trillion in invested assets, also said this week it wants U.S. corporate boards to reflect the increasingly diverse society and workforce. It said company boards should aim to reach 30 percent diversity of membership and have at least two directors who identify as female and at least one who identifies as a member of an underrepresented group.

The firm, which has stakes in thousands of companies around the world, said it may vote against directors who fail to demonstrate a strong commitment to mitigating climate risk and embracing diversity. The asset manager added it would support shareholder proposals on these issues if corporate executives are resistant to change, giving smaller activist investors more clout in the next proxy season.”

As for the SEC:

“Shareholders will likely be more empowered to bring forward stronger proposals thanks to recent guidance from the SEC.

Companies seeking to avoid shareholder votes on ESG issues face a higher burden to have the SEC grant their requests after the agency’s staff in November issued a legal bulletin on no-action requests under a provision known as Rule 14a-8 authorized by the Securities Exchange Act of 1934.

The agency, led by Gary Gensler, a Democrat, said it will be more likely to require companies to hold shareholder votes on public policy issues such as the environment and worker arbitration than it was during the Trump administration as part of its repeal of three legal bulletins issued between 2017 and 2019.

The SEC last month also adopted a final rule that will require companies to provide universal proxy cards in contested director elections, rather than making investors either vote for the company’s entire slate of directors or the dissidents’ slate. Although companies have until Sept. 1 to comply, some may opt in sooner rather than later or face pressure from shareholders to give them more flexibility in voting on directors….

The SEC is also working on other proposals, such as more guidance on reporting on material ESG issues and potential enforcement actions through a task force formed at the beginning of the Biden administration.

Companies and ESG investors are also waiting for the SEC to come out with its potential rulemaking on climate risk disclosure for public companies. That topic has been the main target of lobbyists’ advocacy on ESG issues this year for companies that support and oppose ESG.

“While the SEC has required climate-related disclosures since 2010, this represents an effort to significantly strengthen their relevance and expand the scope of credit risk assessments,” Marina Petroleka, global head of ESG research at the Fitch Group’s sustainability research division, said in an analyst note this month.”

Retirement advisor groups and AARP question Labor Department’s pro-ESG proposal

Last week, two large retirement-centered organizations discussed their reactions to the Labor Department’s proposed new rule on the use of ESG investment strategies in ERISA-governed retirement plans. According to Roll Call, both plan administrators and retirees themselves are leery of the changes proposed by Labor and concerned about their potential impact on retirement investments:

“The biggest trade group for pension professionals urged the Labor Department to clarify a proposed rule to allow retirement plan advisers to consider environmental, social and governance factors when selecting investments, saying it may increase legal risks.

The American Retirement Association, which represents more than 27,000 actuaries and plan administrators, as well as insurance professionals, financial advisers and others, said it’s concerned there could be added legal risks for advisers evaluating investment plans if they fail to consider the economic effects of climate change and other ESG factors.

“While nothing in the proposal gives fiduciaries license to pursue ESG objectives unmoored from or indifferent to an investment’s underlying economic merits, the ARA is concerned that the phrase ‘may often require,’ included in the required considerations, taken together with the Proposal’s preamble, strongly implies that fiduciaries not only have the option to consider ESG investments but should be considering climate change and other ESG factors,” the group said in a letter sent last month. 

Although ARA said it agrees with the proposed rule’s intent to ensure plan advisers can direct investments into ESG options more freely, the organization is concerned that advisers would have a new burden to show why ESG factors were not considered in selecting investments due to the safe harbor regulation. That creates a slippery slope for advisers overseeing larger plans, who view avoiding the risk of litigation as a top priority in demonstrating prudence when selecting plans, it said.

“We cannot emphasize enough how sensitive these stakeholders are to possible litigation risk,” ARA said. “This means that any language, reasonably read, implying, or even suggesting a particular course or fiduciary approach will be perceived as a directive and will be reacted to as such.””

Meanwhile, AARP (formerly known as the American Association of Retired Persons), a prominent retiree-advocacy group also expressed its concerns about the Labor Department proposal, questioning the viability of ESG in retirement portfolios:

“AARP, an advocacy group for people over the age of 50, asked the department to prevent plan fiduciaries from sacrificing ERISA-mandated considerations such as investment return or risk management so they can invest in ESG options. The organization, which has 38 million members, said the department should emphasize that the proposal does not establish a fiduciary standard that is less stringent than the statutory standard.

“As the Department recognizes throughout its proposal, the duty of loyalty is one of ERISA’s fundamental bedrock principles to protect participants and beneficiaries. The use of ESG factors in the selection of investments should be consistent with the duty of loyalty,” David Certner, AARP’s legislative counsel and legislative policy director, said in a Dec. 13 letter. 

“Indeed, these factors should be evaluated as a matter of course if they impact a fiduciary’s analysis of the economic and financial merits of a particular investment, competing investment choices, or investment policy, just like a myriad of other factors that may be material to investment value and risk and return,” he said.”

In the spotlight

Stanford paper describes the “Seven Myths of ESG”

Researchers at Stanford’s Rock Center for Corporate Governance recently released a paper detailing what they describe as the Seven Myths of ESG. According to Cydney Posner, who covers securities law for Cooley, LLP (a corporate law firm), “the authors set about debunking some of the most common and persistent myths about what ESG is, how it should be implemented and its impact on corporate outcomes, “many of which,” they contend, “are not supported by empirical evidence.” Among the myths identified are the following:

  • “Myth #1: We Agree on the Purpose of ESG”
  • “Myth #2: ESG Is Value-Increasing”
  • “Myth #3: We Can Tell Whether a Claimed ESG Activity Is Actually ESG”
  • “Myth #4: A Company’s ESG Agenda Is Well-Defined and Board-Driven”
  • “Myth #5: G (Governance) Belongs in ESG”
  • “Myth #6: ESG Ratings Accurately Measure ESG Quality”
  • “Myth #7: Mandatory Disclosure Will Solve the Problem”