Green Century Opposes U.S. Department of Labor’s Proposal Limiting Retirement Plans from Including ESG Factors into Investment Process
Green Century strongly opposes a proposed rule by the U.S. Department of Labor (DOL) that would make it more difficult to include funds that consider environmental, social, and governance (ESG) factors in retirement plans.
The proposed rule would affect plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), including most corporate defined-contribution plans, such as 401(k) plans.
DOL’s proposed rule would tighten the standard of the “all things equal” test, meaning the plan’s fiduciary can only select ESG funds when the following requirements are met:
- It does not require the plan to give up adding other non-ESG-themed investment options;
- The fiduciary uses only “objective” risk/return criteria to select and monitor all investments; and
- It does not designate the ESG fund as a Qualified Default Investment Alternative.
The DOL failed to provide any evidence in its proposal as to why the “all things equal” standard was changed.
The proposed rule also warns plan fiduciaries to document with caution any ESG fund option in their selection process.
In its comment letter to the DOL, Green Century attempted to clarify the agency’s fundamental misunderstanding of how professional investment managers use ESG criteria to optimize the portfolio construction process. ESG performance is no longer viewed as tangential or contrary to performance but rather central to it.
Studies have increasingly confirmed the importance of including ESG factors in a plan’s investment strategy. Evidence continues to mount that investment strategies that incorporate ESG criteria can produce comparable (or better) performance than non-ESG investments. A 2019 study by Morgan Stanley found that companies with improved ESG characteristics tend to see higher valuations over the long term.
In a 2018 global survey by FTSE Russell, over half of global asset owners said they are implementing or evaluating ESG factors in their investment process. In addition, according to Bank of America Merrill Lynch in 2018, companies with better ESG records had the following characteristics:
- Higher than average three-year returns;
- More likely to become high-quality stocks;
- Less prone to have large price declines; and
- Less likely to go bankrupt.
A 2020 Morningstar article found that for the first quarter of 2020, “Seven out of 10 sustainable equity funds finished in the top halves of their Morningstar Categories, and 24 of 26 environmental, social, and governance-tilted index funds outperformed their closest conventional counterparts.” It must be noted, however, that short-term performance does not guarantee future results.
Based on much of the current research, funds that use ESG criteria are consistent with long-term retirement objectives and the proposed DOL rule would unfairly, and harmfully, limit plan participants’ options and diversification opportunities.
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Stocks will fluctuate in response to factors that may affect a single company, industry, sector, country, region or the market as a whole and may perform worse than the market. Foreign securities are subject to additional risks such as currency fluctuations, regional economic or political conditions, differences in accounting methods, and other unique risks compared to investing in securities of U.S. issuers. Bonds are subject to risks including interest rate, credit, and inflation. A sustainable investment strategy which incorporates environmental, social and governance criteria may result in lower or higher returns than an investment strategy that does not include such criteria.
This information has been prepared from sources believed to be reliable. The views expressed are as of the date of this writing and are those of the Advisor to the Funds.
The total annual fund operating expense ratios of the Green Century Balanced Fund, the Green Century Equity Fund Individual Investor Share Class, the Green Century Equity Fund Institutional Share Class, the Green Century MSCI International Index Fund Individual Investor Share Class and the Green Century MSCI International Index Fund Institutional Share Class, respectively, are 1.48%, 1.25%, 0.95%, 1.28% and 0.98% as of the most recent prospectus.
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