State Street lashes out at new US ESG rule

State Street Global Advisors, the world’s third-largest asset manager, has lambasted a proposed US rule on the use of environmental, social and governance investing across pension portfolios, arguing it could jeopardise the retirement incomes of millions of people.

In June, the Department of Labor set out plans for a rule that would require private pension administrators to prove that they were not sacrificing financial returns by putting money in ESG-focused investments.

But the $3tn asset manager said it did not support the change, joining a growing chorus of organisations and investors calling for the DoL to roll back its proposals.

“Addressing material ESG issues is good business practice and essential to a company’s long-term financial performance — a matter of value, not values,” wrote SSGA’s Lori Heinel, deputy global chief investment officer, and general counsel Katherine McKinley in a letter to the DoL. “We seek to capture these drivers of long-term shareholder value for our clients.”

The use of ESG in investment decisions has become more mainstream in Europe, with a growing acceptance that issues linked to climate change and poor corporate governance can affect the long-term financial health of companies. Asset managers have been heavily invested in the area, growing teams with ESG expertise and launching specialised funds.

But the nascent trend for so-called sustainable investing has faced a backlash in the US, with big corporations lobbying for investors to focus on traditional financial metrics only.

SSGA said it was concerned the DoL was conflating impact investing — which aims to invest with a cause in mind — with so-called ESG integration, when investors consider the potential financial risks of issues such as climate change or high executive pay as part of their stockpicking process.

“While considering material ESG factors in investment strategies provides benefits for investors, the department’s proposal unfortunately discourages such integration by US private sector plan fiduciaries, potentially disadvantaging plans, participants and beneficiaries by restricting access to an entire type of long-term, value-driven investment that could help ensure future retirement security,” according to the SSGA letter.

The rule would increase “uncertainty and legal risk” for retirement plans, SSGA added, while also arguing the DoL’s cost-benefit analysis of the proposed rule “greatly understates costs” to pension plans.

Ceres, a non-profit advocacy group that works with big investors on sustainability issues, has also written to the DoL, saying it was concerned the proposed rule would “dissuade fiduciaries from assessing financially material ESG risks and opportunities for their investments”.

In a response to a DoL consultation, Ceres chief executive Mindy Lubber said the proposed rule “reflects an outdated view that ESG factors are non-financial and considering them can lower returns”.

“The opposite is true,” she wrote. “The evidence is clear that ESG issues pose short, medium and long-term financial impacts and risks that place them squarely within the category of any material, financial risks that are factored in the investment decision.”

Under the proposals, defined contribution pension plans would be restricted from offering ESG funds as default investments — which is where many customers end up. It also requires fiduciaries to provide evidence that ESG-oriented investments have been chosen solely on “objective risk-return criteria”.

The New York State Department for Financial Services, which supervises almost 3,000 banks, insurers, pension funds and other financial institutions with assets of more than $7tn, has also warned that the new rule, if adopted, “would likely undermine the retirement security of workers than protect it”.

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