In 1973, I joined the New York City Fire Department after serving in the U.S. Army in Vietnam. I spent 28 years with the department, rising to the rank of Captain while concurrently serving as the President of the Uniformed Fire Officers Association and the Vice Chairman of the New York City Fire Pension Fund.
Throughout these experiences, I've seen first-hand the dedication that these brave men and women have poured into their profession, accepting daily risks and reduced pay with the promise of a secure and stable retirement. In recent years, I have also watched as pension fund managers shirked their fiduciary obligations to beneficiaries, giving priority to outside interests and increasing their reliance on unaccountable proxy advisory firms.
The Department of Labor's recently finalized rule regarding environmental, social, and governance (ESG) investing practices is a much-needed step toward upholding fiduciary responsibility among ERISA-backed pension-fund managers, ensuring that America's retirees receive the stable, generous pensions that they were promised for so long.
Highest Returns the Goal
Pension funds should be singularly focused on attaining the highest financial returns, adjusted for risk, and ESG investing strategies are a diversion from this goal. Last year, the Pacific Research Group released a study that found that ESG funds were "43.9% smaller compared to an investment in a broader, S&P 500 index fund," after 10 years. Understanding the higher cost and lower returns related to ESG investing, how anyone could see this as compliant to fiduciary duty escapes me. Pension beneficiaries have little to no control over the investment of their retirement money--as such, boards of trustees owe it to their beneficiaries to manage these funds with the greatest care and intent to generate the greatest returns, thus ensuring the pension promised.
It has been heartening to see the level of support that this principle has received since the draft rule was first announced several months ago. In a recent editorial, the Wall Street Journal reaffirmed the primacy of financial goals in ERISA pension investments. They noted that "A fiduciary...can't invest retirement assets only in companies with low carbon emissions or racially diverse workforces when these aren't linked to financial returns. The Labor rule clarifies that financial factors are those that have a 'material effect on the return and risk of an investment.'"
ESG as it exists today—specifically when it underperforms—is at best a dilution of fiduciary duty which compromises the integrity of investment strategies. It is my hope that investors and management teams come to this realization before it significantly harms pensions. In the absence of such an epiphany, clarified and improved regulation reaffirming the importance of financial considerations, not political considerations, is necessary for ERISA-managed pension funds. As long as asset managers are using ESG to demand higher fees for lesser returns, pension funds are not safe from irresponsible investing.
Eye Proxy Advisers Warily
Some of the biggest proponents of ESG are proxy advisers. This industry—98 percent of which is controlled by two firms— provides research and recommendations for investment funds, such as pensions, and sometimes even vote their proxies through a process called "automatic voting." Adherence to fiduciary duty is not required for proxy advisers the way it is for ERISA fiduciaries; therefore their guidance can cause asset managers to violate this bedrock principle. While we should celebrate the Department of Labor's actions on ESG investing, we should also look ahead to a second pending rule that further addresses the undue influence that these proxy advisers wield in pension investment decisions.
These actions from the Department of Labor are a positive step towards further codifying the responsibilities held by those we trust with our money. I applaud this rule as a part of a greater effort to maintain pension funds' independence from politics, and hope that it will guide ERISA fiduciaries back to their original purpose: protecting and growing Americans' retirement.
Editor's note: Mr. Brower is a board member of the Institute for Pension Fund Integrity.
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