ESG

ESG Growth in Hedge Fund Space

One of the top-of-mind issues for plan investment committees is the selection of asset class to incorporate ESG factors. Most of the attention has been on public equities, but institutional investors are increasingly asking service providers about other asset classes. Recent survey results show greater interest in pursuing an ESG strategy via hedge funds. This, of course, begs the important question as to how a committee could assess and select a hedge fund manager that has the resources and experience to effect such a strategy. Consultants and others can help in manager selection. UN PRI also provides guidance on selecting ESG hedge funds.

George Michael Gerstein Sits Down With 401(k) Specialist Magazine to Discuss Fiduciary Implications of ESG Investing

Extract from 401(k) Specialist Magazine: “Does anyone have a concise definition of ESG? Anyone? Neither do we. It’s one of the main sticking points for many 401k advisors and their plan sponsor clients when constructing investment menus with environmental, social and governance (ESG) factors in mind. The DOL and similar regulatory bodies have made attempts at guidance to help clear it all up (most notable in 2008, 2015 and just last month), but true to form with government “help,” it’s too often anything but. Which is why we called George Michael Gerstein, Fiduciary Governance Group Co-Chair with legal powerhouse Stradley Ronon Stevens & Young. Gerstein has followed the issue closely and cleared much of the confusion during a presentation and panel at Fi360’s annual conference in San Diego in April. He took some time to answer the most common questions he’s getting on the topic, and the red flags 401k advisors, sponsors and participants should watch for when entering the space.” A link to the Q&A can be found here.

Ignites: GAO Nudges DOL to Clear Up ESG Guidance

George Michael Gerstein Interviewed by Fund Intelligence on GAO’s ESG Report

Noah Zuss of Fund Intelligence interviewed me, along with Jon Hale (Head of ESG Research at Morningstar) and David Blanchett (Head of Retirement Research at Morningstar Investment Management), regarding the practical effects of the GAO report and its relation to the DOL’s own recent ESG guidance in this developing area. The article can be found here.

Key Takeaways from the GAO Report on ESG Investing by ERISA Fiduciaries

The Government Accountability Office (GAO) yesterday released a new report on ERISA fiduciaries’ incorporation of environmental, social and governance (ESG) factors into its investment process. At 63 pages, here are the key takeaways:

  1. The report is focused only on instances where fiduciaries consider ESG factors as material risk factors that are part of an ordinary prudence analysis. In other words, the GAO did not focus on other strategies (e.g., impact investing), such as those that select an ESG factor for moral reasons, etc., which is the historical association of ESG investing. In this sense, the GAO deserves a lot of credit for focusing on this sophisticated approach to ESG.  You may recall that my paper on climate change risk focused on this very issue.
  2. Rather unfortunately, the report was largely completed prior to the DOL’s issuance of Field Assistance Bulletin (FAB) 2018-01, which we discussed here. The principal recommendation by the GAO is for the DOL to issue guidance on whether a fiduciary can incorporate ESG factors into the management of a default investment option in a defined contribution plan. As you may know, FAB 2018-01 seemed to do just that, though not in an entirely clear manner. Nevertheless, the GAO addressed FAB 2018-01 at the end of the report and narrowed its initial recommendation, namely, that the DOL better explain how fiduciaries can utilize the integration strategy in a QDIA. In the DOL’s defense, FAB 2018-01 seems to address (to some extent) whether a QDIA can utilize the integration strategy; the DOL instead hit the brakes on offering a themed ESG product as a QDIA.
  3. According to the GAO, the DOL is amenable to issuing additional guidance on ESG investing, provided there is enough interest by fiduciaries. The DOL is mum on its Form 5500 project, and whether any ESG disclosures on a revised 5500 are in the works.
  4. Those close to ESG will unlikely find anything surprising in the GAO report on the various reasons why ESG is not yet widely adopted by US retirement plans: questions over the reliability/comparability of disclosures, ratings and rankings–designed to help fiduciaries incorporate ESG factors–all continue to be cited as impediments. Regulatory uncertainty, and definitional ambiguities, also remain hindrances. I recently spoke on a number of these constraints to greater adoption by fiduciaries.

GAO report on ESG Investing Released

The highly anticipated GAO report on ESG has been released. Analysis to follow.

ESG Considerations for ERISA Fiduciaries

I recently moderated a panel for Fi360 called, “ESG Considerations for ERISA Fiduciaries.” Here is a link to the recording.

I was joined by Ali Caffery of Envestnet and Jason Blackwell of Mercer. Too many ESG panels either sidestep the fiduciary issues altogether or discuss them in such abstract terms so as to not be terribly useful. We took a practical approach and walked the audience through some of the key issues a fiduciary should take into account when considering an ESG strategy. We received really strong feedback. I want to thank again Blaine Aikin and his entire team for allowing us to speak on this important topic!

Growth of Sustainability Strategies in US Passive Funds

As highlighted by Ignites, Morningstar recently released a report on the growth of assets in passive funds pursuing a sustainable strategy. Interestingly, about half of the funds are thematic. Unsurprisingly, virtually all are equity funds. The US market for these types of funds continues to lag other regions, though that gap is not unique to ESG passive funds, and applies to ESG broadly.

Live Blogging: ACA Compliance Group Spring Conference

I am here on Amelia Island, FL about to start our panel on fiduciary law developments: the SEC release (and what it means practically-speaking, the delta between adviser and broker-dealer duties, the issues around the new disclosures, etc.), the latest on the DOL Fiduciary Rule (FAB 2018-02, the Fifth Circuit decision, how firms should proceed with compliance), what is in store from state legislatures and regulators, and the recent DOL ESG guidance and how managers should view the guidance. There are over 200 attendees here and, based on questions I received last night, there is a real need for clarity on fiduciary governance at the federal and state levels!

Banks focusing on climate-related risks and opportunities – putting FSB Task Force’s recommendations into motion