Assessing Regulations and Best Practices for ESG Investing

ESG experts discuss the current regulatory and business landscapes regarding ESG reporting and investing.

Standards and regulations for reporting ESG metrics remain in flux, as the Securities and Exchange Commission is yet to announce its final rule on climate disclosures, which would require public companies to disclose information about climate-related risks likely to have a material impact on their business.  

Despite this uncertain environment, speakers at PLANADVISER’s Navigating ESG Livestream on Wednesday discussed what investors should expect, or not expect, from company reporting on ESG-related issues, as well as how plan sponsors can conduct due diligence and proper benchmarking when adding any ESG funds to a retirement plan’s investment lineup. 

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The Regulatory Landscape 

Julie Santoro, an audit partner in KPMG’s U.S. department of professional practice, said investors are primarily waiting on the SEC’s final rule. 

“We know that they had nearly 16,000 comment letters on the climate proposal,” Santoro said. “Even if there was broad support, that doesn’t mean that everybody agreed with the contents of the individual items that were in the proposal.” 

SEC Chair Gary Gensler spoke to lawmakers in an oversight hearing before the Senate Banking Committee in September about some of the areas that are proving particularly difficult as the SEC seeks to finalize its financial statement disclosures, such as those involving scope 3 emissions, which encompass emissions attributable to a company’s supply chain. Scope 3’s complexity arises from a perception that it might require public companies to obtain data from private firms outside of SEC regulation. 

While the SEC has been trying to finalize its rule, California has also come out with its own climate laws, Santoro said. Notably, SB 261 requires public and private companies doing business in California with at least $500 million in revenue to report on their climate-related financial risks.  

The SEC’s ESG fund naming rule was also finalized in September, expanding the types of names that could be considered deceptive or misleading if a fund does not adopt a policy to invest at least 80% of the value of its assets in the investment focus its name suggests. 

“I think what’s really important from an enforcement point of view is the fact that not having the final rules does not stop the staff probing and asking questions about current disclosures and current reporting,” Santoro said. “In summary, yes, we’re waiting for the SEC, but it’s very much a moving environment right now.” 

Adding ESG to the Investment Menu 

Marcia Wagner, founder of the Wagner Law Group, said she believes that this uncertainty will likely have a “chilling effect” on plan sponsors, since many are concerned about class action lawsuits and regulatory investigation or enforcement. 

However, many participants—particularly those in the Millennial and Gen Z age groups—are asking for ESG investment options in their retirement plan’s core lineup, Wagner said. That call is prompting some plan sponsors to consider self-directed brokerage windows to  keep both these participants and plan fiduciaries happy. 

“[There is a] standard protocol that a fiduciary who is an expert in such matters would utilize to determine if [ESG funds] are appropriate to be in the lineup,” Wagner said. “You need an investment policy statement, you need to know what guidelines you’re going to be looking at, there needs to be some type of benchmarking [and] you want a lawyer to write an IPS for you.” 

Wagner added that plan sponsors need to watch out for “greenwashing,” as well. 

Roberto Lampl, ESG sector head of financials and real estate at ISS ESG, explained that greenwashing is when a fund manager sells a fund and claims it is a sustainable, ESG fund, but the composition of the fund does not live up to its name. From a climate perspective, Roberto said to avoid accusations of greenwashing, a fund would have to have a lower exposure to energy intensity, water intensity and waste intensity relative to the benchmark.  

“There are some asset managers that are doing that and are heavily fined, and others rapidly changed the name of the fund or how it was registered,” Lampl said. 

On the positive side, Lampl said more companies are understanding that being transparent about the companies in which they are investing in is going to help their business. A growing number of institutional investors are demanding this information in order to make more informed investment decisions, he said.  

More Lawsuits? 

Wagner said it is likely that three types of lawsuits could appear as a result of what public companies are reporting or failing to report. 

The first potential type of lawsuit, she said, would largely be political and financed by free speech organizations, arguing against the constitutionality of ESG disclosure. Many conservatives, for example, argue that SEC regulations on ESG violate corporations’ free speech rights.  

In addition, Wagner said 401(k) lawsuits are also likely if funds in the core investment lineup do not satisfy standards of prudence under the Employee Retirement Income Security Act.  

Lastly, she said lawsuits could come from retail investors who are not satisfied with their investment options or performance. 

Wagner added that there are certain types of funds she believes will not comply with ERISA, such as “environmental impact funds,” in which the concept of rate of return takes a back seat to the environmental impact.  

“I do think, without a doubt, there will be a lot of lawsuits; I do think all you have to do to not be a victim … is just don’t be low-hanging fruit,” Wagner said. “There is no need to fear [ESG] conceptually, but it is necessary to figure out how this evolving international regulatory initiative is going to comport with the requirements of being a fiduciary.” 

Investors, Betting on Elevated Interest Rates Into ’24, Are Favoring Fixed Income

CoreData finds that 50% of respondents named fixed income as their preferred asset class for risk-adjusted returns—in part due to growing fears of a tech stock bubble.


Institutional investors expect elevated interest rates and inflation in 2024, increasing the appeal of income-generating investments, according to CoreData’s Q3 2023 Equities Sentiment Report.

Fixed income is the most preferred asset class for risk-adjusted returns in the coming year, with 50% of 100 institutional investors surveyed choosing the investment option. That was followed by cash and equities, which shared the same ranking (47%).

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The prospect of higher rates has also prompted investors to adopt a more cautious approach, with 44% slowing down their investment in risk assets and 30% reducing their exposure, according to CoreData. Moreover, 43% of institutional investors have adjusted their strategic allocations to government bonds and cash-like investments, while 39% have grown their tactical exposure to these assets.

“These results show that 5% risk-free yields have completely changed the calculus for institutional investors,” said Michael Morley, U.S. research director at CoreData, in a statement.

Some of the flight to safety is due to the growing concern of a tech bubble forming in the stock market. Seven in 10—71%—said the technology sector is overvalued, up from 55% in Q2, according to the report.

Still Elevated

On November 1, the Federal Reserve held the key federal funds rate between 5.25% and 5.5%; this was the second meeting in which the Fed held rates, after a string of 11 rate hikes. However, inflation remained well above the Fed’s 2% target, the agency noted and said it remains “strongly committed” to bringing prices down.

CoreData’s Q3 survey found that 77% of respondents anticipate that interest rates and inflation will remain elevated over the next 12 months, a notable increase from the 65% figure reported in the Q2 survey, held in June.

Additionally, due to the higher interest rates, 39% of investors have raised their hurdle rate for risk assets, increasing the pressure on asset managers, according to the data providers. This has led to some investors parting ways with managers unable to meet their return expectations, with 38% of organizations reporting offboarding active strategies that have underperformed over recent years.

Still Active

Despite these challenges, 54% of investors maintained confidence in actively managed equity strategies, expecting them to deliver strong outperformance in the next year, the report found. This confidence comes from anticipated subdued market returns, it goes on to say. Yet, just 35% are bullish about U.S. equities in the next three months compared with the 45% who are bearish.

“The trend of de-risking portfolios and consolidating active investments with high-conviction managers is likely to accelerate, putting a painful squeeze on the industry, which is already faced with a low-beta environment,” Morley said.

CoreData’s Q3 2023 Equities Sentiment Report is based on an online survey of 100 U.S. institutional investors conducted in September. Respondent organizations included traditional asset managers, alternative asset managers, public sector pensions, private sector pensions, insurance companies, endowments/foundations and family offices.

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