The department of labor (DOL)’S proposed rule on environmental, social and governance (ESG) investment practices, published in June, intended to add clarity to years of obscure regulatory guidance. Instead, it’s created a layer of complexity among fiduciaries and has fueled more than 1,000 critical comments.

The proposed regulation restates that plan sponsors in defined contribution (DC) plans cannot disregard financial approaches in an effort to pursue ESG-related considerations without violating their fiduciary duties under the Employee Retirement Income Security Act (ERISA).

In plain speak, the proposal claims that ESG practices fail to influence financial gains—even as the coronavirus pandemic grows ESG interest among employers and participants alike. Months after COVID-19 was declared a pandemic, net inflows into ESG funds reached $21 billion, according to Morningstar.

ESG investing has been booming. In fact, research has shown that large exchange-traded and mutual funds with a focus on ESG criteria have generally outperformed the broader market during the pandemic. An S&P Global Market Intelligence study analyzed 17 exchange-traded and mutual funds with more than $250 million in assets under management (AUM) that selected ESG-related stocks and found that 14 of those posted higher returns than the S&P 500, with outperformers rising between 1.8% to 20.1%.

“The growth of ESG investment has ongoing support of megatrends, including greater transparency via improved access to alternative data and ESG reporting, increased awareness of climate change and the risk it poses on investments, and the coming transfer of wealth to sustainability-minded Millennials,” says James Salo, head of data strategy and operations at Trucost, which is part of S&P Global.

A recent blog post by AllianceBernstein (AB) argues against the DOL’s proposed rule. ESG considerations are financial considerations, the blog contends, and employers are taking such considerations seriously. In an ongoing AB survey, two in three employers say they believe ESG integration, such as applying purpose-driven factors in fundamental investment analysis, is in fact their fiduciary duty.

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