Different presidential administrations have gone back and forth over the years on the role that environmental, social and governance (ESG) factors should play in the investments chosen for employer-sponsored pension plans. Now the latest iteration of the regulations proposed by the Department of Labor (DOL) is undergoing some setback.
In a letter To US Secretary of Labor Marty Walsh, a group of senators expressed concern that the latest regulations proposed by the DOL “would dismantle two important actions” taken by the previous administration. In 2020, the DOL under the Trump administration issued a final rule, titled âFinancial Factors in Selecting Plan Investments,â which emphasizes that pension plan trustees should only use âpecuniaryâ factors when making plans. ‘Evaluation of investments of any type, that is, they should only use factors that have a significant and demonstrable impact on performance. The final rule leaves the possibility for plan sponsors to use investments linked to ESG, provided that they are valued in a purely economic manner and that their financial characteristics make them prudent investments.
The rule proposed by the DOL under President Joe Biden in October, titled “Prudence and loyalty in selecting plan investments and exercising shareholder rights,” aims to emphasize that climate change and other ESG factors can be financially significant and that taking these into account can lead to better risk-adjusted returns over the long term. The Biden administration’s DOL said the rule “would remove barriers to the ability of regime trustees to consider climate change and other environmental, social and governance factors when selecting investments and exercising them. shareholders’ rights “.
However, in their letter, the senators argue that the proposed new rule would effectively require “consideration of climate change and ESG factors in all investment and proxy voting decisions.” They also say the proposal “significantly expands the circumstances under which pension trustees can pursue ‘awakened’ ESG causes even when they offer no financial benefit to plan members and beneficiaries.
“As a result, it will significantly hurt Americans’ retirement savings by allowing plan trustees to promote non-cash policy goals such as reducing global carbon emissions and promoting ‘social justice’ rather than standing up for themselves. focus only on maximizing returns on investment, âthe letter says.
Senators say the proposed rule does not define what ESG considerations or factors are, nor does it explain why such terminology is an appropriate regulatory standard. In addition, they say, the proposal does not appear to significantly alter the legal liability of private class actions under the Employees Retirement Income Security Act (ERISA), and the trustees of the plans that select the investments. ESG could face “increased litigation risk if these investments result in higher fees, lower risk-adjusted performance and / or less diversification.” “
Meanwhile, in a letter to the Office of Regulations and Interpretations of the DOL’s Employee Benefits Security Administration (EBSA), the American Securities Association (ASA) expressed similar concerns. Its letter notes that the total assets of ESG funds are skyrocketing “despite the lack of a clear definition of” ESG “and that ESG funds have been shown to charge higher fees than traditional funds.
The ASA is also concerned that the proposed rules will be considered a warrant. âFar from being ‘neutral’ on the subject of ESG investing, the proposal appears to require fiduciaries to incorporate more ESG criteria into their decision-making,â the letter said. “In other words, the ministry takes the position that if a trustee does not include the undefined criteria of the ESG movement in its investment analysis, then the trustee could be in breach of its legal obligations.”
The ASA says, âThe proposal overturns the 2020 rule in a way that would weaken protections for retired investors. ERISA trustees should never be allowed to subordinate the interests of plan members to political objectives. The letter urges the DOL to drop the proposed new rule and instead work to implement the 2020 final rule.
Recently, industry sources expressed support for the new proposal, telling PLANADVISER that it clarified the matter. John Hoeppner, US Head of Stewardship and Sustainable Investments, Legal & General Retirement America, said, âRegarding the comment period and the final rule, I expect this package to be successful. be changed slightly, but I think the main parts will stay. “