DOL Proposal On ESG investing Explained

DOL Proposal On ESG investing Explained
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Commentary on DOL Proposal from Robert “Bob” Smith, CIO and President at Sage Advisory Service, an independent asset management firm with +14AUM, who is quite familiar and quite vocal on what is needed and what is next.

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Thoughts on the Department of Labor (DOL) proposal:

Despite the aim of providing clarity for ERISA fiduciaries, in our view, the proposal creates confusion. This is because there appears to be in part, a failure on the part of the DOL to distinguish the difference between ESG integration and economically targeted investments (ETIs). And so, you know, we think that the proposal says that ERISA fiduciaries are obligated to integrate ESG factors in their investment analysis. That's great—if they determined that those factors were likely to have a material economic impact on the investment. However, they then say that if a fiduciary does not believe that ESG factors will have a material economic impact on the investment, it will not be permitted to consider those factors. This was very confusing. Should I or should I not bother?

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Sage looks at social impact and ESG risk as sometimes intertwined and nota one size fits all proposition, does the DOL get the nuances of ESG investing:

The with this kind of pronouncement, this attempt to change the law says that fiduciaries, ERISA fiduciaries, may not sacrifice investment returns or assume greater investment risks as a means of "promoting collateral social policy goals." But that statement in and of itself, in the pronouncement, reflects their very erroneous understanding of the true and evident benefits of good, solid core quantitative ESG risk analysis that will accrue to ERISA plans and to plan participants over the long term. It's a very confusing proposal. We think that they are behind the curve in understanding the true nature and value and effort put into quantitative ESG risk assessment and how it's become a much more pivotal and cornerstone factor for a lot of investment managers around the globe.

The new DOL proposal could impact or scare off potential people interested in ESG product into their 401k platform:

From a fiduciary standpoint, they put some fear into the marketplace, because now fiduciary duty within the context of ERISA relates to someone who has to manage people's money and how they should act in terms of the interest of plan beneficiaries. It means they have to serve in the interests of the investors as opposed to themselves. That's the most important feature of the law—firm adherence to client loyalty and prudence.

We don't see that ESG in any way, shape, or form violates the interests of the fiduciary standing. You also have to consider all risks, particularly ESG focused risks, and apply good judgment and objective analysis. And in the pursuit of what we believe is really important, and what I think a lot of investors are looking for is good, moral, ethical and prudent decision-making—that kind of bubble up from this process. And this guidance, this DOL proposal, in my view, is essentially putting it into a secondary or tertiary position, in essence making ESG analysis kind of a second-class citizen in terms of the order of importance.

DOL still pushing back. There should be a consensus that ESG analysis has been underutilized in the past and there is a place for it and a need for it more so than ever.

The DOL is misinformed. Their position doesn't necessarily reflect what is going on in the marketplace. When you look at the growth and the interest in ESG-focused and optimized funds, whether in the mutual fund community or the exchange-traded fund community, across the board in institutional investment management, this proposal seems to deny the clear trends that are in the marketplace.

If we look at it from a 401(k) perspective our workforce is demographical, we have a number of people within the workforce that are very environmentally sensitive, are very socially aware, you know, and recognize good deeds when they see them and good governance when they see them. They are very desirous of these values.

It's not just the millennials; it's the X generation and, more importantly, the Z generation.

They will constitute the largest segment of our workforce, you know, at 2025 and beyond. And yet we have a system that's wired and built and oriented towards the Boomer generation. And if you think about it, what this particular proposal does—it's an attempt to essentially push ESG back, to reduce its value, and not to give recognition for these trends.

It denies the obvious—the consumer. What the consumer wants, and who that consumer is, is rejected by this DOL proposal. More and more millennials and Z generation, X generation people, are highly charged over these issues and want to see it infused in their investments that they decide upon. It also denies the idea that ESG funds are superior in their performance, particularly over the last two, three, four, or five years. They've done extremely well compared to a lot of conventional funds.

So, what is the prudent choice? Is it prudent to pick the best funds that are being run in the best way, with the best outcomes? If that's the case, and that's what your fiduciary should be charged with doing, then why not ESG optimized funds? Because they stand head and shoulders above a lot of the conventional alternatives that are in the plan design, as it is today.

What’s next with DOL proposal

The way you evoke, and you enforce change, is that you make your position known. This proposal is exactly what it is, a proposal that requires public commentary. We need to change the mind at the DOL through our voice, our engagement. All advisors must become a change agent.

They see the value of ESG integration as a risk mitigation effort, as getting at the heart and soul of what investors want in terms of their investment products they're investing in, and the positive intentionality that accrues in terms of the corporate management's that receive the benefit of the capital flows from 401k plans—those are the change agents. We want to get the DOL on board with being a change agent, the only way we do that is become engaged and make yourself known. Otherwise, we will be stuck in the bygone era of how DC plans (defined contribution plans) should be run for the past, not for the future.

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Jacob Wolinsky is the founder of, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at) - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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