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Comments on DOL ESG Proposal

July 30, 2020

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Office of Regulations and Interpretations
Employee Benefits Security Administration
Room N-5655
U.S. Department of Labor
200 Constitution Avenue, NW
Washington, DC 20210
Attention: Financial Factors in Selecting Plan Investments Proposed Regulation


Re:      Financial Factors in Selecting Plan Investments (RIN 1210-AB95) 

Ladies and Gentlemen:

The Investment Adviser Association (IAA)[1] appreciates the opportunity to comment on the Department’s proposed amendments to the “Investment duties” regulation under Title I of the Employee Retirement Income Security Act of 1974, as amended (ERISA).[2] The Proposed Amendments address the consideration of environmental, social, and corporate governance (ESG) factors in the investment process. The Proposed Amendments also include provisions that would apply to a fiduciary’s consideration of all plan investments, whether or not the result of ESG considerations.

We strongly urge the Department to withdraw this far-reaching rulemaking. We appreciate and share the Department’s interest in ensuring that ERISA investors receive the best possible advice to enable optimal investment performance. We are concerned, however, that the preamble to the Proposed Amendments (Preamble) reflects a fundamental misunderstanding about how investment advisers and other investment professionals consider ESG factors as part of the investment process, and how ESG investments are used for the benefit of plan participants and other investors. Moreover, the selection of investment strategy and individual investments should be left to the judgment of investment advisers that serve as fiduciaries, making decisions in the best interest of their clients. Their decisions must be based on all relevant criteria and circumstances related to both the investor and the potential investments. We also disagree with the Department’s position that the Proposed Amendments would not increase burdens on fiduciaries of considering ESG factors.[3] The Proposed Amendments would impose increased costs and burdens on fiduciaries for all types of investments, and would unnecessarily limit investment choice for plan participants and beneficiaries, without the Department having demonstrated the need for these amendments or having conducted an adequate analysis of their likely costs. Before the Department moves forward, it should, at a minimum, solicit information about ESG investing through a request for information or a roundtable with ERISA plan fiduciaries and investment professionals. The IAA would be pleased to participate in any such effort.

Several significant concerns with the Proposed Amendments compel us to urge its withdrawal, including the following:

  • Consideration of ESG factors as part of the investment process is a pecuniary consideration and is consistent with a fiduciary’s duty of prudence.
  • The proposed additional requirements in connection with ESG investments are unnecessary, unclear, and would have negative impacts on investors.
  • The proposed comparability provision is both unattainable and unnecessary, and would increase costs and risks for fiduciaries.
  • The Department should not explicitly or implicitly favor one type of investment over another or improperly limit investor choice.

Our strong belief is that the Department should not proceed with this rulemaking. However, if it does, it should at the very least hold a public hearing to ensure appropriate consideration of the concerns of the investor community, address the issues discussed in this letter, grandfather all current investments in ERISA plans, and allow for an adequate period of time for implementation.


I. Background Regarding the Consideration of ESG Factors by Investment Advisers

An increasing number of investment advisers take into consideration ESG factors as part of their investment process. For example, 42 percent of institutional investors incorporated sustainability into their investment decision making in 2019, compared to 22 percent in 2013.[4] In a 2017 survey by the CFA Institute, 73 percent of respondents said that they take ESG issues into account in their investment analysis and decisions, with governance being the most common.[5] Firms take these factors into account because they find it beneficial for investment performance, particularly over the long term, and crucial for prudent risk management. As one report stated, “For investment professionals, a key idea in the discussion of ESG issues is that systematically considering ESG issues will likely lead to more complete analyses and better-informed investment decisions.”[6] In its report regarding the consideration of ESG factors in retirement investing, the Government Accountability Office (GAO) found that:

Investors are reported to increasingly use [ESG] factors to assess a wider range of risks and opportunities that may otherwise not be taken into account in financial analysis (footnote omitted)…. For example, some investors believe that companies with good corporate governance practices—like well-designed incentives in how executives are compensated—are better managed and will perform better financially over time and thereby deliver better long-term value to shareholders.[7]

The Department’s presumption that consideration of ESG factors is likely to result in underperformance is not supported by the data. Research suggests that ESG portfolios earn returns comparable to the market return, while reducing risk and providing diversification benefits.[8] The GAO Report notes that “[a]cademic research on the performance of investments incorporating ESG factors suggests that such factors can be a valid financial consideration, both in the aggregate and as individual factors.”[9] In fact, the GAO’s review of the research found “a neutral or positive relationship between the use of ESG information in investment management and financial returns in comparison to otherwise similar investments.”[10]

Retirement investors are typically investing for the long term, and investment advisers often consider ESG factors because of the long-term impact of these factors on investment returns. The GAO Report recognizes this, stating that “[c]limate change may be a particularly important ESG factor for long-term investors in the United States, such as retirement plans.”[11] The report notes that retirement plans may be vulnerable to climate risks “given their direct and indirect investments across economic sectors as well as their longer investment time horizons.”[12]

Investors are also increasingly interested in ESG investing, and this is particularly true for those aged 18-37. According to a 2019 report, 85 percent of individual U.S. investors and 95 percent of those aged 18-37 expressed an interest in sustainable investing, and 52 percent of individual U.S. investors and 67 percent of those aged 18-37 take part in at least one sustainable investing activity.[13]

ESG investing is likely to take on increased prominence due to the COVID-19 pandemic. As one report stated, “[o]ver the long run, COVID-19 could prove to be a major turning point for ESG investing, or strategies that consider a company’s environmental, social and governance performance alongside traditional financial metrics.”[14] The Department’s skeptical view of ESG is, thus, we believe, short-sighted.


II. Consideration of ESG Factors as Part of the Investment Process is a Pecuniary Consideration and is Consistent with a Fiduciary’s Duty of Prudence

The Department states in the Preamble that the Proposed Amendments are designed to make clear that “ERISA plan fiduciaries may not invest in ESG vehicles when they understand an underlying investment strategy of the vehicle is to subordinate return or increase risk for the purpose of non-pecuniary objectives.”[15] The Department should not assume that plan fiduciaries, including investment advisers, intend to subordinate return or increase risk when they make a decision to invest in ESG vehicles or to consider ESG factors as part of their prudent investment process. The objective of investment advisers that engage in these strategies on behalf of their ERISA clients is to seek a competitive return on their clients’ investments and manage risks, with the goal of “[p]roviding a secure retirement for American workers.”[16] Investment advisers must consider a number of criteria about their clients and any potential investment recommendations, including client objectives, portfolio holdings, strategy, and risk-adjusted performance. Consideration of ESG factors is consistent with well-established ERISA fiduciary principles. The Proposed Amendments are not necessary because ERISA fiduciaries understand their obligations in Section 404 of ERISA to act with prudence and solely in the best interest of participants and beneficiaries.

Moreover, the Department – for good reason – has not historically dictated what is a prudent investment process or a generally accepted investment theory and it should not do so now. Limiting or favoring one type of an investment or investment process over another limits the ability of qualified investment professionals to fulfill their fiduciary duties. It is both inappropriate and inconsistent with any fiduciary standard that applies to investment advisers, including ERISA’s standards of care and loyalty, for the Department essentially to prescribe what investments those fiduciaries may or may not recommend to their clients.[17] Consideration of ESG factors is today a component of generally accepted investment theory,[18] and the Department should not be in the business of picking winners and losers from among generally accepted investment theories.

The Department expresses concern, without evidence, “that the growing emphasis on ESG investing may be prompting ERISA plan fiduciaries to make investment decisions for purposes distinct from providing benefits to participants and beneficiaries and defraying reasonable expenses of administering the plan.”[19] On the contrary, prudent plan fiduciaries that consider ESG factors believe that such consideration will financially benefit plan participants and beneficiaries and will facilitate effective risk management. The Department’s premise that consideration of ESG factors will virtually never be pecuniary is inaccurate and would hinder the ability of qualified investment professionals to fulfill their duties and would limit participants’ investment choices.

The proposed amendments to the “Investment duties” regulation, Rule 404a-1, discuss the consideration of pecuniary and non-pecuniary factors. The proposed definition of a “pecuniary factor” is “a factor that has a material effect on the risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and the funding policies established pursuant to section 402(a)(1) of ERISA.”[20] Under proposed Rule 404a-1(c)(1), ESG “or other similarly oriented considerations are pecuniary factors only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories.” The Department appears to recognize in the Regulatory Impact Analysis that consideration of ESG factors may be pecuniary when it states that “[s]ome DB [defined benefit] plans that consider ESG factors would not be affected by the proposed rule because they focus only on the financial aspects of ESG factors, rather than on non-pecuniary objectives.”[21] However, elsewhere in the Preamble the Department takes a very narrow view of situations in which a qualified investment professional may appropriately treat ESG factors as “material economic considerations under generally accepted investment theories.”[22] The examples of permissible ESG factors for consideration provided by the Department are a company’s improper disposal of hazardous waste and dysfunctional corporate governance.[23] In our view, it would likely be inappropriate and inconsistent with an adviser’s fiduciary duty for an adviser not to consider these egregious examples in any investment decision.

Today, investment advisers consider ESG factors as economic drivers and risk mitigants, similar to other risk-return factors. The Department, however, does not appear to contemplate that ESG factors may be material in circumstances that do not involve extreme risk or mismanagement, nor does it appear to contemplate that the integration of ESG factors into the investment process is pecuniary. We believe this is a mistake. The Department portrays the consideration of ESG factors as outside the investment process, but this is inaccurate. Prudent investment considerations should include those things that are appropriate and relevant under Section 404 of ERISA, and for the Department to propose a regulation that divides economic considerations from ESG considerations is to misunderstand the investment process. The consideration of ESG factors on behalf of ERISA clients as part of the investment process is a pecuniary process that is consistent with a fiduciary’s duty of prudence.

Moreover, many types of investment considerations that today may be considered ESG factors have long been part of a prudent investment process. For example, even before the market coined the term ESG, investment advisers analyzed crop and climate reports in connection with reviews of companies that use agricultural products in their supply chains. A plan fiduciary considering how climate change might affect a company’s future business, or doing due diligence on a company’s management, is doing so as part of its efforts to increase return and manage risk for plan participants, which is what ERISA requires of plan fiduciaries. The Department uses the term “generally accepted investment principles” in the proposed rule text, but the Department does not appear to recognize that these “principles” are dynamic and change over time. For example, investment advisers analyzing portfolio companies’ risk management programs may now be focusing on how those companies are dealing with the COVID-19 pandemic. The consideration of ESG factors is now widely considered to be part of the framework of generally accepted investment principles.

The Department’s statement that one of the purposes of the Proposed Amendments is to “separate the legitimate use of risk-return factors from inappropriate investments that sacrifice investment return, increase costs, or assume additional investment risk to promote non-pecuniary benefits or objectives”[24] appears to be based on the incorrect assumption that ESG investing reduces returns, increases risks, and subordinates returns to a non-pecuniary objective.[25] ERISA plan fiduciaries that consider ESG factors and invest in ESG investment vehicles are not promoting non-pecuniary benefits or objectives, but instead are engaged in a prudent investment process that is designed to benefit plan participants and beneficiaries. ESG considerations, such as those related to climate change, may be particularly significant for investments held by long-term retirement investors.[26] We have serious concerns that the combination of the Department’s skepticism about ESG investing and the additional proposed requirements that we discuss below may cause plan sponsors and plan fiduciaries to feel it necessary to artificially decouple investment factors into those that are permissible under the regulation and those that are not, which may lead them to avoid taking into account any ESG considerations. This would not be a beneficial result for plan participants and beneficiaries and indeed would affirmatively harm retirement investors.


III. The Proposed Additional Requirements in Connection with ESG Investments are Unnecessary, Unclear, and Would Have Negative Impacts on Investors

The Department should not impose additional requirements on a particular investment process or strategy. All investments have unique characteristics and risks, and investment advisers as fiduciaries understand their obligations under ERISA with respect to plan participants and beneficiaries. We believe that singling out ESG investments, or the analysis of ESG investments, sets a dangerous precedent, and would likely have a chilling effect on future innovations in investing and investment analysis. The current regulatory framework provides significant protections to plan participants and beneficiaries such that additional requirements are unnecessary. The Department states that fiduciaries should be “skeptical of ‘ESG rating systems’—or any other rating system that seeks to measure, in whole or in part, the potential of an investment to achieve non-pecuniary goals—as a tool to select designated investment alternatives, or investments more generally.”[27] Investment advisers and other fiduciaries use a variety of inputs to analyze investments, and ESG ratings may be one of those inputs. We are concerned that this type of statement by the Department may limit the development of additional analytical tools in the ESG investment space.

Proposed Rule 404a-1(b)(1)(ii) and Proposed Rule 404a-1(c)(1)

It is not clear how fiduciaries would comply with the proposed analytical and documentation requirements. With regard to the analysis, proposed Rule 404a-1(b)(1)(ii) would require a fiduciary to evaluate all investments and investment courses of action:

based solely on pecuniary factors that have a material effect on the return and risk of an investment based on appropriate investment horizons and the plan’s articulated funding and investment objectives insofar as such objectives are consistent with the provisions of Title I of ERISA.

As discussed above, proposed Rule 404a-1(c)(1) provides that:

Environmental, social, corporate governance, or other similarly oriented considerations are pecuniary factors only if they present economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories. The weight given to those factors should appropriately reflect a prudent assessment of their impact on risk and return.

It is unclear how an ERISA plan fiduciary would demonstrate compliance with these provisions. For example, if an investment adviser conducts any type of review or analysis across companies, would it be required to demonstrate that each review or analysis had “a material effect on the return and risk” on each investment over all periods? In addition, if an investment adviser’s review of board structure or composition was considered to be a “G” consideration, would the adviser be required to show that each review presented “economic risks or opportunities that qualified investment professionals would treat as material economic considerations under generally accepted investment theories?” Similarly, how would the adviser show that the weight given to that review “reflected a prudent assessment of [its] impact on risk and return?” There is also no way for an adviser to determine what considerations would be viewed under the regulation as “similarly oriented considerations.” The fact that the Department felt the need to include this type of “catchall” provision indicates that the Department is aware that there is a spectrum of investment considerations, all pecuniary, that are integrated into the investment process. Nevertheless, the proposal would attempt to deter investors from using the full spectrum of considerations.

Investment advisers routinely analyze a wide range of research, reports, and quantitative and qualitative factors as part of a prudent investment process, and the incorporation of ESG factors is one of many components in that process. We believe that it would be extremely burdensome, if not impossible, to show the specific economic value of each component of that review, ESG or otherwise.[28] These proposed provisions also put investment advisers at a disadvantage when decisions are reviewed with the benefit of hindsight. The investment process is holistic. Attempting to separate each consideration is not feasible. As long as an investment adviser uses a prudent process for selecting investments, it should not be subject to these additional requirements.

Proposed Rule 404a-1(c)(3) and Investment Platforms for Defined Contribution Individual Account Plans

In the case of investment platforms for defined contribution individual account plans that include one or more ESG or “similarly oriented assessments or judgments in their investment mandates,” or include those parameters in the fund name, proposed Rule 404a-1(c)(3)(i) would require the ERISA plan fiduciary to use:

only objective risk-return criteria, such as benchmarks, expense ratios, fund size, long-term investment returns, volatility measures, investment manager investment philosophy and experience, and mix of asset types…in selecting and monitoring all investment alternatives for the plan including any environmental, social, corporate governance, or similarly oriented investment alternatives (emphasis added).

Proposed Rule 404a-1(c)(3)(ii) would further require the fiduciary to document its selection and monitoring of the investment in accordance with proposed Rule 404a-1(c)(3)(i).

These proposed requirements raise a number of questions. For example, like our discussion above regarding “similarly oriented considerations,” what does the phrase “similarly oriented assessments or judgments” mean? Would an investment adviser’s review of each portfolio company’s board structure and composition – which is a standard consideration – mean that the investment mandate includes “similarly oriented assessments or judgments” that would subject the fiduciary to the requirements in proposed Rule 404a-1(c)(3)? The Proposed Amendments raise the question of whether a fund that is not branded or marketed as an ESG fund may be offered to ERISA clients where the adviser to the fund incorporates consideration of any ESG factors into the investment process. Neither the Proposed Amendments nor the Preamble adequately addresses this question. Also, why should a fiduciary be required to conduct the review described in proposed Rule 404a-1(c)(3)(i) across “all investment alternatives for the plan” just because an investment platform includes an ESG investment? Requiring this review and documentation would significantly increase burdens and costs on fiduciaries.

Under proposed Rule 404a-1(c)(3)(iii), an ESG “or similarly oriented investment mandate alternative” may not be added as, or as a component of, a qualified default investment alternative (QDIA). Again, it is not clear what would be considered a “similarly oriented investment alternative.” In addition, ESG investments or investment processes that integrate the review of ESG considerations currently may be included as components of target date funds that serve as QDIAs in order to provide additional diversification, which benefits plan participants and beneficiaries.

Plan Fiduciaries Would Incur Significant Costs to Comply with the Proposed Amendments

The Department states in the Regulatory Impact Analysis that “[w]hile fiduciaries may modify the research approach they use to select investments as a consequence of the proposed rule, the Department assumes this modification would not impose significant additional cost.”[29] We strongly disagree with this conclusion. Not only is it not clear how an investment adviser would be expected to demonstrate compliance with the proposed analytical requirements, but the Department also has not adequately assessed the associated costs. The proposed requirements would impose significant compliance burdens and costs on ERISA plan fiduciaries, and the Department substantially underestimates these burdens and costs. The lack of clarity around the proposed requirements makes the related proposed documentation requirements similarly unclear. In addition to the significant costs and burdens on ERISA plan fiduciaries, we are very concerned that an unintended consequence of this rulemaking would be that plan sponsors would prohibit investment advisers from including in their investment processes consideration of any E, S, or G factor, even though including such factors may lead to better returns, particularly over the long term, and better risk management for plan participants and beneficiaries. The combination of these additional and ambiguous provisions, and the Department’s skeptical tone in the Preamble, increases the chilling effect on the selection of these investments.


IV. The Proposed Comparability Provision is Both Unattainable and Unnecessary, and Would Increase Costs and Risks for Fiduciaries

Proposed Rule 404a-1(b)(2)(ii)(D) provides that, for purposes of Rule 404a-1(b)(1), appropriate consideration of an investment or investment course of action includes “[h]ow the investment or investment course of action compares to available alternative investments or investment courses of action with regard to the factors listed in paragraphs (b)(2)(ii)(A) through (C) of this section.” Paragraphs (b)(2)(ii)(A) through (C) include the composition of the portfolio with regard to diversification, the liquidity and current return of the portfolio relative to the anticipated cash flow requirements of the plan, and the projected return of the portfolio relative to the funding objectives of the plan. The Department states in the Preamble that “[c]larifying that an investment or investment course of action must be compared to available alternatives is an important reminder that fiduciaries must not let non-pecuniary considerations draw them away from an alternative option that would provide better financial results.”[30]

This proposed provision is extremely broad and its application is not clear. For example, an investment adviser managing a fund or separately managed account focused on U.S. fixed income securities would not look at equity securities for potential investments. Plan fiduciaries selecting investment options for their plans understand their duties when considering investments and investment courses of action, including reviewing alternatives where appropriate as part of that process. The Preamble provides no guidance on the reasonable parameters for the proposed comparisons. The proposed approach is also counter to the Department’s recently proposed investment advice class exemption, in which the Department recognizes that a fiduciary is not expected to compare a potential investment to every other potential investment to determine which is the best. The Department states in the preamble to that proposal that “[t]he best interest standard in this proposal would not impose an unattainable obligation on Investment Professionals and Financial Institutions to somehow identify the single ‘best’ investment for the Retirement Investor out of all the investments in the national or international marketplace, assuming such advice were even possible at the time of the transaction.”[31] We question why the Department did not take a similar approach here. This proposed provision sets up an unattainable standard, and is likely to lead to increased costs and risks for fiduciaries without providing commensurate benefits to plan participants or beneficiaries.

In addition, while the proposed provision does not include a specific documentation requirement for every investment selected, we believe that it is an implicit requirement that investment advisers will feel compelled to follow in order to avoid regulatory second-guessing and litigation. This represents a significant burden for every investment decision without a clear benefit to plan participants or beneficiaries.


V. The Department Should Not Explicitly or Implicitly Favor One Type of Investment Over Another or Improperly Limit Investor Choice

The Value of Active Management

In the Regulatory Impact Analysis, the Department states “as plans invest less in actively managed ESG mutual funds, they may instead select mutual funds with lower fees or passive index funds. In this case, the societal resources freed for other uses due to lessened active management (minus potential upfront transaction costs) would represent benefits of the rule.”[32] This statement conflates several erroneous points and reflects a fundamental misunderstanding about active management. First, although ESG investing inherently involves active decision-making, there are both active approaches and index-based approaches to ESG investing. Second, both active and passive management involve a range of fees. In other words, there are higher and lower cost active funds, including ESG funds, and higher and lower cost passive funds, including ESG funds. Third, actively managed ESG funds are not necessarily more expensive than actively managed funds that do not incorporate ESG. Fourth, the Department is simply wrong that reducing the use of active funds would benefit investors, re-introducing a longstanding, misguided Department view of active management.[33]

Thus, the Department’s framing of this issue entirely misses the mark and perpetuates a false dichotomy pitting active management against passive management. Both active and passive management, and indeed a wide range of investment strategies, have important roles to play in investment management and the markets.[34] Active management adds value by helping to meet investors’ individualized and multifaceted risk, return, and other long-term goals. Active management enables investors to navigate complexity, manage risk, capitalize on specific skills, or profit from market inefficiencies.[35] The fundamental research that is the hallmark of many actively managed investment strategies enables a nuanced approach to evaluating ESG factors, enabling more customized portfolios. Active management also contributes to market efficiency and price discovery.[36] Passive management can help reduce cost, particularly in more efficient market segments. Indeed, the great majority of investment advisers – 75 percent – believe that active and passive strategies complement each other in constructing an effective portfolio.[37] The Department recognizes the value of active management in a recent Information Letter regarding “the use of private equity investments within professionally managed asset allocation funds that are designated investment alternatives for participant-directed individual account plans.”[38]

Retirement policies should recognize the importance of preserving investor access to a range of investments and investment strategies, and the Department’s commentary should not include language or analysis that favors one type of investment strategy over another. The value of investor choice is not fairly measurable by a single metric of cost. Retirement savers should have access to a sufficient variety of investment products and strategies to meet their goals, and maintaining that access is a benefit, not a cost. As we have previously commented to the Department, active management is unquestionably a generally accepted investment strategy.[39]

We also strongly disagree with the Department’s statement regarding “societal resources.” The “societal resources” used in active management, including fundamental research and analysis, serve to benefit investors, including plan participants and beneficiaries. Indeed, in addition to adding value on a risk-adjusted basis, active management is critically important to healthy markets, making markets efficient, by keeping price in line with value. Active management also supports capital formation and entrepreneurship, providing a market for IPOs and other forms of capital-raising. Discouraging active management in no way benefits investors and fails to preserve investor choice. The Department should not place its finger on the scale favoring passive funds to the detriment of investors.

The Proposed Amendments Improperly and Needlessly Limit Investor Choice

It is imperative that government policies do not explicitly or implicitly favor one type of investment management over the other. Doing so is not consistent with Section 404 of ERISA that requires fiduciaries to engage in a prudent investment process in the best interest of plan participants and beneficiaries. We believe that it is beneficial for retirement savers to have a wide variety of available investment options because of the differences in their needs, goals, and preferences. Government policies also should not limit choice or create disincentives for investors to save for retirement. We believe that the Proposed Amendments would improperly and needlessly limit investor choice, with the likely result that many investors may limit their participation in ERISA retirement plans. As discussed above, many investors want an ESG investment as part of a diversified long-term retirement portfolio.[40] Plan participants, particularly younger plan participants, may be more likely to participate, or may increase their participation, in retirement plans that provide ESG investment options. Conversely, prohibiting plan fiduciaries from considering ESG factors for plan investments may cause younger plan participants not to participate in, or to contribute less to, retirement plans.


VI. If the Department Proceeds, it Should Grandfather Investments in ERISA Plans and Provide for an Adequate Implementation Period

We have very serious concerns about this rulemaking and do not believe that the Department should proceed with it. If the Department goes forward with this rulemaking, however, it should grandfather all existing investments in ERISA plans. Participants should not be forced to exit investments, which could be detrimental to them in terms of increased costs and decreased returns. Firms also should not be required to change the composition of existing QDIAs, including target date funds. Fiduciaries should not retroactively be subject to the documentation and other requirements of the Proposed Amendments for current investments.

As proposed, the amendments would be effective 60 days after the date of publication of the final rule in the Federal Register. If the Department does not grandfather these investments, it should provide at least 18 months for implementation. And, even if the Department grandfathers these investments, it needs to provide a sufficient period of time of at least 12 months for fiduciaries to implement any new requirements.

* * *

We strongly believe that, rather than proceed with this rulemaking, the Department should further study current data and practices in ESG investing and the consideration of ESG factors in the investment process. We are very concerned that the Proposed Amendments will bring with them a number of unintended consequences, including pecuniary harm for investors and significant burdens and costs for plan fiduciaries, and will unnecessarily limit investment choice for plan participants and beneficiaries. We appreciate the Department’s consideration of our comments and would be happy to provide any additional information that may be helpful. Please contact Sarah Buescher, IAA Associate General Counsel, or the undersigned at (202) 293-4222 if we can be of further assistance.

Respectfully Submitted,

Gail C. Bernstein
General Counsel

Appendix:       Sustainable Investing is an Active Process, Investment Adviser Association Active Managers Council

[1] The IAA is the largest organization dedicated to advancing the interests of investment advisers registered with the Securities and Exchange Commission (SEC). For more than 80 years, the IAA has been advocating for advisers before Congress and U.S. and global regulators, promoting best practices and providing education and resources to empower advisers to effectively serve their clients, the capital markets, and the U.S. economy. The IAA’s member firms manage more than $25 trillion in assets for a wide variety of individual and institutional clients, including pension plans, trusts, mutual funds, private funds, endowments, foundations, and corporations. For more information, please visit

[2] Financial Factors in Selecting Plan Investments, 85 FR 39113 (June 30, 2020), available at (Proposed Amendments).

[3] 85 FR at 39121.

[4] Sustainable Investing is an Active Process, Investment Adviser Association Active Managers Council, citing Callan Institute, 2019 ESG Survey. The Active Managers Council’s report is attached as an appendix to this letter.

[5] Environmental, Social and Governance (ESG) Survey, CFA Institute (2017), available at

[6] Environmental, Social, and Governance Issues in Investing, A Guide for Investment Professionals, CFA Institute (Oct. 2015), available at

[7] Retirement Plan Investing: Clearer Information on Consideration of Environmental, Social, and Governance Factors Would be Helpful, Government Accountability Office (May 2018), available at (GAO Report) at 4.

[8] See Gunnar Friede, Timo Busch, and Alexander Bassen, ESG and Financial Performance: Aggregated Evidence from More than 2000 Empirical Studies, Journal of Sustainable Finance & Investment (2015), available at; Sustainable Reality, Analyzing Risk and Returns of Sustainable Funds, Morgan Stanley Institute for Sustainable Investing (Aug. 2019), available at; Majority of ESG Funds Outperform Wider Market Over 10 Years, Financial Times (June 13, 2020); and John Hale, U.S. ESG Funds Outperformed Conventional Funds in 2019 (Apr. 16, 2020), available at

[9] GAO Report at 7.

[10] GAO Report at 7-8.

[11] GAO Report at 6.

[12] GAO Report at 7.

[13] Sustainable Signals: Individual Investor Interest Driven by Impact, Conviction and Choice, Morgan Stanley Institute for Sustainable Finance (Sep. 2019), available at

[14] Why COVID-19 Could Prove to Be a Major Turning Point for ESG Investing, J.P. Morgan, quoting Jean-Xavier Hecker and Hugo Dubourg, Co-Heads of ESG and Sustainability at J.P. Morgan EMEA Equity Research (July 1, 2020), available at

[15] 85 FR at 39116.

[16] 85 FR at 39115.

[17] See Letter from Kathy D. Ireland, Associate General Counsel, IAA, regarding Definition of the Term “Fiduciary” (RIN 1210-AB32) (July 21, 2015), available at (IAA 2015 Letter).

[18] “Among the new normals that may come starkly into view when the all-clear sounds is that ESG integration is likely to be considered foundational to assessing a company’s ability to weather major disruption.” Why ESG Matters in a Crisis, Institutional Investor (June 9, 2020) [sponsored by AEGON], available at

[19] 85 FR at 39116.

[20] Proposed Rule 404a-1(f)(3). We note that proposed Rule 404a-1(b)(1)(ii) would require fiduciaries to evaluate all investments and investment courses of action “based solely on pecuniary factors that have a material effect on the risk and return of an investment….” The proposed definition of “pecuniary factor” already includes “material effect on the risk and/or return of an investment” and it is not clear why the Department repeated the language in Proposed Rule 404a-1(b)(1)(ii).

[21] 85 FR at 39121.

[22] Proposed Rule 404a-1(c)(1).

[23] 85 FR at 39116.

[24] 85 FR at 39116.

[25] In its Regulatory Impact Analysis, the Department makes a similar statement that “[t]o the extent that ESG investing sacrifices return to achieve non-pecuniary goals, it reduces participant and beneficiaries’ retirement investing returns” without providing any data showing that is the case. 85 FR at 39121.

[26] “Climate change has increasingly been recognized as an important long-term investment risk by some retirement plans and other investors because it is expected to have widespread economic impact.” Cover Letter to GAO Report.

[27] 85 FR 39118, n. 24.

[28] We also believe that showing compliance with proposed Rule 404a-1(c)(2), which addresses the “all things being equal” test and would require alternative investments to be “economically indistinguishable” would be extremely challenging, if not unworkable.

[29] 85 FR at 39121-39122.

[30] 85 FR at 39117.

[31] Improving Investment Advice for Workers & Retirees, 85 FR 40834 (July 7, 2020), at 40843.

[32] 85 FR at 39121.

[33] See Definition of the Term “Fiduciary” (RIN 1210-AB32), available at, and IAA 2015 Letter. In response to our 2015 comments, the Department appropriately did not include its safe harbor for passive funds in its subsequent re-proposal of the fiduciary rule.

[34] Members of the IAA’s Active Managers Council met with Department staff last fall regarding the value of active management, urging the Department not to favor passive over active management implicitly or explicitly in its policymaking. Council members presented the research referenced in n. 36 infra and noted the important role that both active and passive management play for investors.

[35] See Martijn Cremers, Jon A. Fulkerson, and Timothy B. Riley, Challenging the Conventional Wisdom on Active Management: A Review of the Past 20 Years of Academic Literature on Actively Managed Mutual Funds, Financial Analysts Journal, Vol. 75, No. 4 (Fourth Quarter 2019), available at; and David F. Lafferty, CFA, Chair, IAA Active Managers Council, A More Balanced Narrative, Setting the Record Straight on Active Management, available at

[36] See Russ Wermers, Active Investing and the Efficiency of Security Markets (Dec. 15, 2019), available at; and IAA Active Managers Council, Active Management and Market Efficiency: A Summary of the Academic Literature, available at

[37] See Lee Barney, Advisers Say Active and Passive Investing Go Hand in Hand, quoting Brendan Powers, Senior Analyst at Cerulli, (Apr. 10, 2018), available at

[38] Information Letter 06-03-2020, available at

[39] See IAA 2015 letter.

[40] See Section I.

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