The New York State Department of Financial Services ("NYDFS") urged the DOL to reconsider a proposed amendment to regulations under the Employee Retirement Income Security Act of 1974 ("ERISA"), arguing that the proposed amendment would discourage the consideration of environmental, social and governance ("ESG")-related investments.
The DOL-proposed amendments would confirm that the "Investment duties" regulation under Title I of ERISA "requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action."
In a comment letter, NYDFS argued that adoption of the proposed rule would harm the retirement security of workers by impeding ESG considerations in investments. NYDFS cited a recent Morningstar Study showing that sustainable funds outperformed the market in 2019, and that such funds have significantly outperformed the market during the COVID-19 pandemic.
NYDFS added that the proposed rule would hinder the global competitiveness of U.S. companies, as governments around the world promote the consideration of ESG factors for investors and the financial market.
Commentary
This NYDFS letter appears to be largely meant for public consumption, rather than as a serious policy or legal challenge.
The DOL's proposed rule is intended to make clear that ERISA plan fiduciaries have an obligation to invest so as to maximize returns to retirees, and fiduciaries may not "subordinate" that obligation to a non-financial objective, such as ESG investing. In return, NYDFS argues that ESG-motivated investments produce competitive if not superior returns.
If NYDFS is, in fact, correct, then NYDFS and the DOL are on the same page; there is surely no reason for a fiduciary to avoid a profitable investment just because the investment does well on ESG measures.
If NYDFS wanted to challenge the DOL on policy grounds, NYDFS should have argued that it was okay for a fiduciary to sacrifice investment returns to achieve an ESG goal. The fact that NYDFS chose not to assert a more meaningful policy challenge to the DOL may indicate some uncertainty as to whether such a position was defensible as a legal matter (or would be politically popular with retirees, who are the ones having money at stake). Given the letter that NYDFS did write, the DOL has no reason to amend its rule proposal as NYDFS didn't dispute the premise of the proposal.
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