Pending rulemaking set to limit ESG-focused investments by ERISA plan fiduciaries, as DOL’s concurrent letters raise questions.
By Paul A. Davies, Paul M. Dudek, and Kristina S. Wyatt
Letters to Registered Investment Advisors (RIAs)
The US Department of Labor (DOL) has reportedly sent letters[1] to several registered investment advisors seeking information about their use of environmental, social, and governance (ESG) funds in retirement plans, as reported by media outlets including Financial Advisor Magazine and Think Advisor. According to news sources, the DOL’s Employee Benefits Security Administration has asked the RIAs for detailed information about their policies and practices regarding ESG-focused investments. The information requested reputedly includes the RIAs’ policies and procedures, communications, performance information, and the names of individuals who participated in making ESG-focused investment decisions.
The timing of the DOL letters has raised eyebrows given the agency’s pending rulemaking, which aims to restrict plan fiduciaries’ investments in ESG funds, as noted below. News outlets quoted Bryan McGannon, director of Policy and Programs at US SIF, the Forum for Sustainable and Responsible Investment, as objecting to the enforcement actions: “This is a move that is clearly designed to intimidate and if it’s followed up by enforcement it will have a chilling effect on fiduciaries’ willingness to consider ESG funds in retirement plans.”
As reported by a number of German newspapers and the environmental press, a dispute between the US proxy advisory firm Institutional Shareholder Services (ISS) and the German industrial image processing company Isra Vision came to a rapid conclusion before the Regional Court of Munich when ISS withdrew its objection against a preliminary injunction. As a result, the relevant ESG rating concerning Isra Vision was not published.
Financial services regulators have been particularly vocal in the last 12 months, specifically about the impact on the financial services sector as the world experiences, and attempts to respond to, climate change.
In a recent 
Companies are facing increasing pressure to report on environmental, social, and governance (ESG) matters in terms of their legal obligations, stakeholder pressure, and reputational issues. Companies are subject to both mandatory and non-mandatory non-financial reporting obligations. For the first time, in 2018, under the Non-Financial Reporting Directive (NFRD), certain companies must publish in their annual reports information relating to environmental, social, and employee matters, respect for human rights, and anti-corruption and bribery matters. The NFRD therefore bolsters existing mandatory disclosure obligations under the Modern Slavery Act 2015 and the Climate Change Act 2008. The forthcoming Conflicts Minerals Regulation will further strengthen these obligations.
The China Securities Regulatory Commission (CSRC), in collaboration with China’s Ministry of Environmental Protection, has introduced 
China has issued numerous green policies in an effort to support President Xi’s signature “One Belt, One Road” initiative, which aims to mitigate environmental and social risks arising from China’s overseas lending. Although few of these policies are legally binding, they reflect China’s heightened focus on environmental issues, both at home and abroad. However, given China’s increasing number of foreign direct investments over the last few years, more legally binding obligations may be necessary to better address resulting environmental and social risks.