For many of us, this year’s election looms larger than any in memory. The issues at stake, from healthcare to the pandemic response, racial justice to immigration, climate change to the Supreme Court, all somehow feel more urgent and immediate than ever before. For investors specifically concerned about environmental, social and governance (ESG) issues, two rules recently put forward by the current administration are acute reminders of how election results can ultimately shape even less widely understood aspects of commerce, and of life.
While the country grappled with the COVID-19 pandemic in late June, the Department of Labor (DOL) quietly proposed rule changes to “update and clarify” its regulations around private, employer-sponsored retirement plans. The proposed changes specifically target ESG investing, and would limit the ability of retirement plan sponsors to offer 401(k)-type plans that include a focus on ESG factors among their investment criteria.
Despite an unusually short public comment period (of just one month), the proposal received more than 8,700 comments, of which at least one analysis found an overwhelming 95% opposed to the proposed rule change. Firms as prominent as Fidelity commented that the proposal “would result in harmful, far-reaching consequences for ERISA plans and participants.” Others, like BlackRock, shared concerns that the proposal “creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially material ESG factors, regardless of their potential effect on the return and risk of an investment.” Industry groups such as the American Benefits Council, the Insured Retirement Institute, and even the US Chamber of Commerce also submitted comments opposing the rule as written.
Of the many flaws we find in the proposed rule, we believe the most egregious is the assumption that consideration of ESG factors runs counter to investors’ financial interests. As pointed out by the Harvard Law School Forum on Corporate Governance, “numerous sophisticated investors have indicated that their ESG investments, social benefits notwithstanding, are fundamentally driven by expected financial returns.” This sentiment, echoed again and again in the public response to the proposed rules, is one we wholeheartedly endorse. It is one we hope the DOL will come to better understand before deciding whether to put the rules into effect.
At the same time the new DOL rules were proposed, the US Securities and Exchange Commission (SEC) was preparing to enact previously proposed rule changes to limit the ability of shareholders to file resolutions at the annual meetings of companies they own a stake in. Previously, the SEC required any shareholder who wished to file a resolution to hold at least $2,000 in shares for at least a year. The updated rules require holding $25,000 for at least a year, $15,000 for at least two years, or $2,000 for at least three years, a dramatic raising of the bar for investor-owners who wish to take action on concerns they have about the companies they own. In a parallel and no less significant set of changes, the SEC also raised the vote threshold required to resubmit such resolutions in subsequent years, going from required vote support of 3%, 6% and 10% in each of the first three years, respectively, to 5%, 10% and 25% in each of the first three years under the new rules.
While the SEC describes the rule changes as a “modernization,” there is little doubt that the goal is to limit the ability of smaller shareholders to file resolutions. Commenting on the passage of the new rules after a 3-2 September vote, Commissioner Elad Roisman confirmed that the amendments “ensure that shareholder-proponents demonstrate a sufficient economic stake or investment interest in a company before they are able to submit proposals to be included in a company’s proxy statement.”
In their own public statements following the vote, the two dissenting SEC commissioners offered strong words in opposition, including those of Commissioner Allison Herren Lee, who said that taken with other recent changes, the new rules “put a thumb on the scale for management in the balance of power between companies and their owners.” Lee’s words echo those found in hundreds of public comments, including from many US Senators, members of Congress, state and local governments, state securities regulators, asset managers, pension funds, labor unions, universities, and even the SEC’s own Investor Advisory Committee. Mindy Lubber, CEO and President of Ceres (a prominent investor advocacy network), declared that the rule “will undermine the functioning system of shareholder democracy in the United States.” And in a revelation that became notorious, Bloomberg reported during the comment period that two separate groups, funded by or associated with the National Association of Manufacturers, had submitted fake letters of support for the rule from “Main Street” investors, including supposed veterans, retirees, a public servant and a single mom. These letters were prominently cited by SEC Chairman Jay Clayton when he announced the proposed new rules.
Both the DOL and SEC proposals were put forward by political appointees; in the case of the SEC rule changes, every voting commissioner was installed by the current administration. Elections matter. As ESG investors, we must remember this applies not only to the most highly visible issues, but also to our opportunity to own a stake in a company based on the conviction that long-term value creation is impossible without prioritizing people and planet.