New DOL ESG Guidance Expected to Encourage More Plan Adoption

TIAA says a variable annuity and mutual funds that take an ESG approach are widely used on its retirement plan platforms.

In a TIAA webinar held Thursday, “Understanding the DOL ‘ESG Rule’ and its Impact on Plan Sponsors,” speakers said they expect the new rule to encourage more plan sponsors to embrace environmental, social and governance (ESG) investing, particularly because it has started to become more mainstream and continued to deliver strong performance.

According to the Forum for Sustainable and Responsible Investment, ESG investments in the U.S. in the fourth quarter of last year amounted to $17.1 trillion, comprising 33% of total U.S. assets under management (AUM).

“We feel very strongly about the growth of ESG funds inside ERISA [Employee Retirement Income Security Act] plans,” said David Swallow, managing director, consulting relations, TIAA. “We feel good that the DOL [Department of Labor] listened to the industry on including ESG as part of the portfolio. TIAA has been a leader in responsible investing since 1990. We know that it reduces risk and improves outcomes.”

Nonetheless, retirement plan sponsors should amend their investment policy statements (IPSs) to reflect the new DOL rule, which went into effect on January 12, said Michael Hadley, partner with Davis & Harman LLP.

The final rule removed any mention of ESG and, instead, said that plan fiduciaries need to focus solely on pecuniary, or performance, factors when selecting funds for a retirement plan lineup, he said. “The language in the final rule is important because it showed that the DOL recognized that ESG can have an impact on risk and return.”

In the final rule, the DOL also streamlined the way it defined pecuniary.

“It originally was wonky, and it originally was asking fiduciaries to consider every possible alternative to ESG funds,” Hadley said. “There was also a lot of repetitive language on prudence. In the final rule, the standards for including an ESG fund in a plan menu are significantly simplified.”

In an instance in which a plan fiduciary finds no difference between an ESG fund and an alternative, or what the DOL calls a tiebreaker, a plan fiduciary can consider non-pecuniary factors such as ESG considerations but they must document why they select one fund over the other, Hadley said.

TIAA and Nuveen began their responsible investing in the 1970s, said Amy O’Brien, head of responsible investment at Nuveen. In the decades since, the objective has largely remained the same but the approach has changed, she said. “2020 is a tipping point for ESG investments,” O’Brien said. “Today, ESG is integral to investment management, and we have had a longstanding belief that ESG is an additional performance and risk management lens.”

Today, she noted, nearly 90% of the companies in the S&P 500 Index publish some type of report on their ESG footprint, she said. “Responsible investing informs better decisions by generating alpha, better managing risk and uncovering new investment opportunities,” O’Brien said. “Eighty-four percent of the market value of the S&P 500 is now comprised of intangible assets affected by ESG factors. Seven of the top 10 global risks identified by the World Economic Forum are ESG-related issue, and $12 trillion in market opportunities could be achieved in meeting the United Nations Sustainable Development goals by 2030. These are all tangible values for our investors.”

In fact, TIAA has an ESG annuity and an actively managed and a passively managed ESG mutual fund that are widely used on its retirement platforms, said Drew Krepelka, senior investment strategist at TIAA. “We are a player in this space,” he said. “This is not just a side job for us.”