Businesses don’t operate in a financial vacuum —don’t hamstring pension managers

As a young child in the late 1970s, my favorite snack was Dannon coffee yogurt that my mother and I would get from Pronio’s, a small neighborhood grocery store that first opened its doors in 1919. All I knew at the time was Dannon yogurt was delicious and the people who worked at Pronio’s were friendly.

What I didn’t know at the time was that Antoine Riboud, then CEO of Danone, had delivered in 1972 one of the most far-seeing speeches of any corporate executive in the modern era.

Addressing a French workers association meeting, Riboud stated, boldly for the time period, “Corporate responsibility does not end at the factory gate or the office door.” In his remarks, Riboud heralded a future state of capitalism characterized by an enlightened understanding of the role, responsibility and potential of business beyond short-term profits. He drove Danone to implement his ideas, and the multinational company thrived, with greater positive externalities and fewer negative ones.

I also didn’t know at the time that throughout Pronio’s history, and despite ever-increasing economic pressures on independent family-owned grocery stores, its owners and employees continued to deliver differentiated service at fair prices while supporting the community that supported them. One hundred years after its founding, Pronio’s is still going strong, as is the community in which it is embedded.

Which naturally brings us to the topic at hand: ERISA.

Before your eyes glaze at the thought of contemplating the federal Employee Retirement Income Security Act, signed into law by President Ford 46 years ago this month, consider that you or someone close to you has money that is part of the nearly $10.7 billion in ERISA pension plans. You’re (in)vested, one way or another.

One of ERISA’s purposes is to protect plan investments in order to provide income security in retirement. It does so in part by codifying a fiduciary duty requiring a plan to be managed and administered “for the exclusive purpose of providing benefits to participants and their beneficiaries.”

That sounds straightforward enough, and the U.S. Department of Labor’s (DOL) regulations implementing that statutory fiduciary duty have more or less kept faith with congressional intent for nearly half a century, while ensuring that fiduciaries can consider new market information and insights to better fulfill their duty.

Until recently.

Earlier this summer, DOL issued a proposed ERISA regulation titled “Financial Factors in Selecting Plan Investments.” The widely recognized intent of the rule is to prevent asset managers of ERISA plans from selecting an investing strategy incorporating environmental, social and governance (ESG) factors.

ESG factors and analysis, which did not exist when ERISA was enacted in September 1974, provide asset managers and plan beneficiaries with a more complete understanding of a company’s risk profile and operating principles, beyond mere revenue and profit/loss reporting. Whether a company is sourcing supplies in a sustainable manner or has faced a pattern of enforcement activity indicating fundamental management problems are examples of ESG factors. 

This additional level of analysis enhances the ability to project potential financial returns over time — in other words, to decide whether investing in a particular company or fund is in the best financial interest of plan beneficiaries.

When the proposed rule first was announced in early June, Labor Secretary Eugene Scalia, son of the late U.S. Supreme Court Justice Antonin Scalia,  was dismissive of ESG factors, framing the issue as a false choice for fiduciaries between ESG factors on the one hand and DOL’s proposed “financial factors” on the other.

Yet when the Labor Department’s comment period on the proposed rule closed at the end of July, the comments reflected overwhelming opposition: more than 95 percent of the 8,636 individual or institutional comments submitted to DOL opposed the proposed rule. What’s more, comments in opposition came from capital markets firms such as T. Rowe Price, BlackRock and Putnam Investments — and for good reason: 

Incorporating ESG factors when evaluating possible investments results in a better risk-mitigated portfolio, which translates into higher returns over time. In 2019, for example, funds that expressly incorporated ESG factors into portfolio decisions outperformed funds that did not.

Morningstar, a well-known longtime provider of independent investment analysis, not only opposed the rule but proposed its inverse: considering ESG factors should be required of ERISA pension investment plans.

DOL has not yet announced its intention regarding the proposed rule, but Congress ultimately is where this issue should be resolved. 

Danone and Pronio’s are, respectively, among the world’s largest and smallest food service businesses that successfully navigated macroeconomic changes for over a century, thanks to microeconomic decisions based on what are now considered ESG factors.

Danone stock trades on Euronext Paris and is in France’s CAC 40 index, which is analogous to the Dow Jones Industrial Average, consisting of some of the most successful public companies in the United States. Pronio’s continues to deliver a customized neighborhood grocery experience at affordable prices using local labor, earning intergenerational loyalty from customers and maintaining a level of profitability that defies industry odds. Both businesses figured out the enterprise value of ESG factors before “ESG factors” and ERISA existed.

Without much legislative effort and with the certainty of broad-based support as evidenced by the comments submitted to DOL, Congress could modernize ERISA’s statutory fiduciary duty to require that ERISA pension plans evaluate ESG factors when making investment decisions.

Such a simple change would ensure those entrusted with investing pension assets can factor in all material information — including a category of information unavailable in September 1974 — to advance ERISA’s goal of income security in retirement.

Christopher J. Hunter is a nonresident senior fellow with the Atlantic Council’s Scowcroft Center for Strategy and Security, as well as a managing director and chief legal officer of IWP Family Office, a national family office firm.