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Expanded ESG Looms Over 401(k) Funds Already Mired in Red Tape

June 1, 2022, 7:50 PM

Regulators would overemphasize the “E” in ESG retirement investing by expanding annual company disclosures to probe climate change risk mitigation efforts, according to advocacy groups and Biden administration critics.

The US Labor Department is weighing plans to augment its proposed rule on environmental, social, and governance retirement investing by grilling plans for more information about how they choose their investments.

Retirement investing is the latest battle in the Biden administration’s effort to remake the federal government in a greener image, but ESG reports in the employee benefits space—filed with the Labor Department—may be one document too many for companies facing a deluge of ESG disclosures. The Securities and Exchange Commission has proposed a handful of corporate ESG disclosures targeting financial adviser greenwashing and corporate transparency, and more could be on the way.

Retirement disclosures targeting specific investment-level risks are unprecedented, critics told the department in a recent series of comment letters. Any special focus on climate risks would elevate those factors too far above other financial hazards, tilting the investment management scales the department had purportedly sought to balance.

Plan decision-makers, who the department holds to a strict, fiduciary standard of care, could face additional legal exposure and costly burdens under a Labor Department-borne reporting program.

“Fiduciaries should not feel pressured to evaluate climate risk with any greater scrutiny than they would give any of the other myriad important factors that go into making an investment decision,” said Lynn Dudley, senior vice president of global retirement and compensation policy at the American Benefits Council.

Proposed Rule

The DOL’s Employee Benefits Security Administration issued a request for information in February seeking input from stakeholders about whether the agency should add climate-risk questions to the Form 5500 reports plans are required to submit annually.

Agency officials have repeatedly said that the RFI shouldn’t be construed to preview any upcoming rulemaking projects. Biden signed a whole-of-government executive order requiring agencies to assess climate-related threats within their regulatory purview.

“The president asked us a question,” said Acting Assistant Secretary for Employee Benefits Ali Khawar. “In general, when the president asks you a question, you try to make sure you give him a good answer. I’m not saying it to be quip. That literally is the core of how we were thinking about and how we approached and how we developed it.”

The request shouldn’t also be conflated with the agency’s proposed ESG rule easing plan’s access to socially responsible funds.

Yet, even supporters of the agency’s existing ESG regulatory project say the possibility of climate-related employee benefit disclosures go too far. Climate risk is a relevant consideration in a fiduciary’s investment analysis, prescribed under the Employee Retirement Income Security Act (Pub.L. 93-406), wrote David Abbey, deputy general counsel for retirement policy, and Shannon Salinas, associate general counsel for retirement policy, at the Investment Company Institute.

“The most effective action the Department can take is to finalize its Proposed Rule to clarify the way ERISA fiduciaries may consider ESG factors—such as climate-related risk factors—in evaluating plan investments,” their comment letter reads.

ESG retirement investing emerged as a political flashpoint under prior administrations that volleyed sub-regulatory guidance over whether those considerations can be financially material—the legal requirement for investment decisions in federally regulated private-sector plans.

State officials from seven states claimed the department’s information request builds on the proposed rule by elevating “immaterial and speculative” climate risks above others and suggesting a “mandate” on climate-related investment decisions. The attorneys general and other state officials from Alabama, Alaska, Arizona, Arkansas, Florida, and Georgia said climate risk should be treated the same as other serious risks, such as inflation, foreign conflicts, changing consumer tastes, or tech-based financial disruption.

“The current rules recognize that ESG factors could present material risk,” they wrote. “But the RFI takes a big step further: no longer would a plan fiduciary simply treat climate-related risk as any other risk. Instead, a plan fiduciary would specifically focus on climate-related risk in a variety of ways,” they wrote.

To contact the reporter on this story: Austin R. Ramsey in Washington at aramsey@bloombergindustry.com

To contact the editor responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Jo-el J. Meyer at jmeyer@bloombergindustry.com