Commentary: Labor Department is protecting public pensions from political investments

This op-ed originally appeared in the Washington Examiner on August 14, 2020.


Over the past decade, a strategy known as Environmental, Social, and Governance, or “ESG investing,” has been pushed to the forefront as a tool by public officials and investment managers to promote environmental or social causes through pension fund investments. This requires special attention to making sure pension fund managers are bound by their fiduciary obligation to their beneficiaries and not acting from political motives.

Prioritizing issues other than pure financial returns may be an acceptable strategy for individuals managing their own money or for corporate officers contemplating the future of their company. But for fiduciaries, prioritizing any interest other than maximizing returns is a dereliction of duty.

The Department of Labor has released a proposed rule on tax-qualified retirement plans governed by ERISA in order to determine the extent to which ESG factor into investment decisions. The question at hand is whether plan managers, bound by fiduciary duty to their beneficiaries, are sacrificing investment returns or increasing risks to meet ESG goals unrelated to participants’ bottom-line financial interests.

As a former state treasurer of Connecticut, I have personally overseen the management of a public pension system. It is not possible to fully protect the financial security of a plan’s beneficiaries if those charged with managing a pension fund are trying to build an investment strategy around non-financial considerations. Decisions on new investment strategies, whether they are driven by political reasons or simply as an attempt to chart a new path forward, must be made in the boardroom.

There are many laudable initiatives that individuals, religious endowments, schools, and other private entities may wish to consider. However, it is never correct to impose personal political motives on pension funds. This principle is even more prevalent given the massive financial ramifications that the economic fallout of the COVID-19 pandemic has had on pensions.

The Department of Labor should be applauded for taking this necessary step toward clarifying and correcting guidance on the fiduciary obligations of pension fund managers as far as ESG investing is concerned. As Labor Secretary Eugene Scalia noted, this rule aims to “remind plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end.”

The proposal falls short, however, of fully protecting America’s pension beneficiaries from unsound investment practices. Public pensions are still vulnerable to ESG strategies. The trend towards “impact investing” has permeated the proxy voting industry, where two firms effectively control significant numbers of shareholder votes in thousands of publicly traded companies. These votes could become an important weapon against ESG policy that does not serve the shareholders, but under the current rules they mostly serve an ideological agenda separate from the interests of retirees and public employees.

SEC commissioner Daniel M. Gallagher acknowledged the problems with the proxy voting industry as far back as 2013, noting that the current system is not built to increase company value or generally operate on behalf of shareholders, but rather to serve the interests of the proxy voting companies themselves. The proxy voting issue is not one that the rule change at hand would address. While the proposal is a step in the right direction, it is important to think not only about how pension money is invested, but also how the voice that comes with a stake in any given company is used. Until we reform the proxy voting industry, that voice will be vulnerable to the whims of third parties.

The Department of Labor is currently considering the proposed rule. It is my hope that leaders in business, finance, and public policy will continue to voice their support for this initiative. Beyond the scope of this proposed rule, ERISA must be modernized to ensure that fund’s investment strategies remain focused on fiduciary duty and the best risk-adjusted return. The retirees of this nation deserve as much.

Christopher Burnham is founder and president of the Institute for Pension Fund Integrity. He previously served as Connecticut state treasurer, chief financial officer of the U.S. Department of State, and under-secretary-general of the United Nations.