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ESG Retirement Investing Proposal Tilts Toward Climate Goals (1)

Oct. 13, 2021, 3:49 PMUpdated: Oct. 13, 2021, 6:17 PM

The U.S. Labor Department proposed a rule Wednesday that would allow workplace retirement investors to focus on environmentally friendly funds and cash in on companies combating climate change.

DOL’s Employee Benefits Security Administration’s proposal would reverse former President Donald Trump’s regulations on the use of environmental, social, and corporate governance factors in retirement portfolios and fiduciaries’ use of proxy voting powers in favor of social or political goals. Trump’s rules limited investments and related decisions to “pecuniary” factors, sowing doubt among industry practitioners about whether climate change and environmental factors would qualify.

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President Joe Biden has taken a hard-line approach to his predecessor’s ESG and proxy voting rules, issuing executive orders that required a review of Trump’s climate-related rules and later calling on the DOL to propose a rule that would “suspend, revise, or rescind” the ESG regulations. EBSA in March said it wouldn’t enforce either Trump rule.

Wednesday’s proposed rule would amend the Trump regulations to remove barriers that may limit fiduciaries from considering climate change and other environmental, social, and governance factors when selecting investments or exercising proxy voting rights.

‘Investment Horizons’

Unlike the Trump rules, the Biden proposal specifically uses the term “ESG” and states that climate change and other ESG factors may be considered when assessing a fund’s projected return. Failure to consider any factor that is financially material could put plan participants and beneficiaries at risk, the rule states.

“Climate change is particularly pertinent to the projected returns of pension plan portfolios that, because of the nature of their obligations to their participants and beneficiaries, typically have long-term investment horizons,” the proposed rule states. “The effects of climate change such as sea level rise, changing rainfall patterns, and more severe droughts, wildfires, and flooding are expected to continue to pose a threat to investments far into the future.”

The proposal would eliminate special standards for qualified default investment alternatives—the types of funds participants are invested in when their employers automatically enroll them in a plan. The proposed rule would establish the same financially material analysis for those types of investment decisions as it would for all other types of funds.

The Trump rule required fiduciaries to determine that otherwise equal funds, or “tie-breakers,” be economically indistinguishable, but the Biden proposal would revert that standard to a prudent determination that competing investment courses of action equally serve financial interests. It also would eliminate special documentation requirements for those decisions.

The proposal also seeks to undo safe harbors Trump had established for fund managers who chose not to participate in shareholder voting. It would eliminate onerous documentation requirements proxy voters would have to provide under the prior rules when casting ESG-related votes.

“The bias that the previous administration’s rules created was to really favor not voting and not taking action, but these are assets that are owned ultimately by the participants and beneficiaries and the obligations that fiduciaries have in other contexts don’t stop when you’re talking about proxy voting,” said Acting EBSA Assistant Secretary Ali Khawar during a press briefing Wednesday. “They need to be thinking about what is the financially material best outcome for participants and beneficiaries and use that really as the north star and guide for how they’re thinking about these questions.”

The public has 60 days after the rule is formally published in the Federal Register to comment on the proposal.

(Updated with additional reporting throughout.)

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

To contact the editors responsible for this story: Martha Mueller Neff at mmuellerneff@bloomberglaw.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com; Andrew Harris at aharris@bloomberglaw.com

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