Different presidential administrations have been back and forth over the years about the role environmental, social and governance (ESG) factors should play in investments chosen for employer-sponsored retirement plans. Now, the latest iteration of regulations proposed by the Department of Labor (DOL) is getting some pushback.
In a letter to U.S. Secretary of Labor Marty Walsh, a group of senators say they are concerned that the DOL’s latest proposed regulations will “dismantle two important actions” taken by the prior administration. In 2020, the DOL under the Trump administration published a final rule, titled “Financial Factors in Selecting Plan Investments,” which emphasizes that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type—which is to say that they should only use factors that have a material, demonstrable impact on performance. The final rule leaves room for plan sponsors to use ESG-related investments, provided that they are assessed in a purely economic manner and that their financial features 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,” seeks to emphasize that climate change and other ESG factors can be financially material and that considering these elements can lead to better long-term risk-adjusted returns. The Biden administration’s DOL says the rule would “remove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance factors when they select investments and exercise shareholder rights.”
However, in their letter, the senators argue that the newly proposed rule would effectively mandate “consideration of climate change and ESG factors in all investment and proxy voting decisions.” They also say the proposal “vastly expands the circumstances in which retirement plan fiduciaries can pursue ‘woke’ ESG causes even when they provide no financial benefits to plan participants and beneficiaries.
“As a result, it will significantly harm Americans’ retirement savings by allowing plan fiduciaries to promote non-pecuniary policy objectives like lowering global carbon emissions and promoting ‘social justice’ rather than being solely focused on maximizing investment returns,” the letter says.
The senators say the proposed rule fails to define what ESG considerations or factors are, or explain why such terminology is an appropriate regulatory standard. In addition, they say, the proposal does not appear to significantly change any legal liability from private class action lawsuits under the Employee Retirement Income Security Act (ERISA), and plan fiduciaries who select ESG investments could face “increased litigation risk should those investments result in higher fees, inferior risk-adjusted performance, and/or less diversification.”
Meanwhile, in a letter to the Office of Regulations and Interpretations at the DOL’s Employee Benefits Security Administration (EBSA), the American Securities Association (ASA) expressed similar concerns. Its letter notes that total assets for ESG funds are soaring “despite there being no clear definition of ‘…….