Conflict looming over DOL ESG rule

As might be expected, a political battle has flared over the Biden Administration’s proposed rule that would allow fiduciaries to consider climate change and other environmental, social and governance factors when they select investments and exercise shareholder rights.

Earlier this month, a group of Republican senators called on the Biden Administration to withdraw the rule altogether. That follows praise by Democratic senators when the proposal first was issued in October.

The comment period on the proposal closed last week and more than 22,000 commenters weighed in on the proposal. Presumably, the administration will review the comments to determine if a final rule should be issued.

The Biden Administration rule represents a reversal of a Trump Administration regulation. The Trump Administration rule required sponsors of investment-based employee plans to strictly apply ERISA rules. That essentially would have kept environmental, social and governance issues from being considered when investments were made.

The Biden Administration first simply rescinded the Trump rule and then, in October, issued one of its own. Labor Department officials said they were concerned that the Trump Administration plan created a perception that fiduciaries were at risk if they considered any environmental, social and governance issues.

“The proposed rule announced today will bolster the resilience of workers’ retirement savings and pensions by removing the artificial impediments – and chilling effect on environmental, social and governance investments – caused by the prior administration’s rules,” said Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar, as the proposal was unveiled. “A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”

Labor Department officials said that the proposed rule would remove barriers to plan fiduciaries and allow them to consider climate change and other environmental, social and governance factors in selecting investments.

The proposal states that climate change and other ESG factors are often material and that in many instances fiduciaries should consider climate change and other ESG factors in the assessment of investment risks and returns.

And the political battle was on.

Sen. Patty Murray, D-Wash., chairwoman of the Senate Health, Education, Labor and Pensions Committee and committee member Sen. Tina Smith, D-Minn. praised the rule.

“Financial security is about planning for the future, so it’s just common sense that ERISA fiduciaries be allowed to consider the environmental, social, and governance factors that are shaping the future,” the senators said.

However, Republican senators, led by Senate Banking Committee ranking Republican Patrick Toomey of Pennsylvania and Senate Finance Committee ranking Republican Mike Crapo earlier this month panned the rule.

In a letter to Labor Secretary Marty Walsh, they asked the department to withdraw the proposal, saying that the Trump Administration had made it clear that fiduciaries of retirement plans must put the financial interests of plan participants and beneficiaries first.

The Biden Administration rule effectively mandates consideration of climate change and other similar factors in all investment and proxy decisions, they said.

“The proposal does not provide a rational basis for the contention that climate change and other ESG factors are often material or that they are not already priced into the market,” the senators added.