Energy Investment and the ERISA ESG Spigot

July 8, 2021, 8:01 AM

Pension fund assets, historically, have comprised one of the largest sources of fossil fuel investments. Increasingly, however, there is growing interest from pension funds in sustainability, and environment, social, and governance (ESG) considerations in investments. Sustainability is seen as a key indicator of long-term value creation and ESG factors material to a business are viewed as a critical component of sustainability.

As climate concerns grow, investment in fossil fuel companies has been impacted. Public pensions factoring ESG and climate concerns into investment decisions have in some instances divested of fossil fuel investments, addressing the energy transition and risk and return considerations.

Recently, Maine became the first state to enact a law requiring the $17 billion public employees’ pension fund to divest of any fossil-fuel holdings by 2026. The New York State Pension Fund has also indicated it will divest certain high-risk fossil fuel companies over the next five years.

The three largest U.S. public pension funds ($458.9 billion California Public Employees’ Retirement System; the $299.8 billion California State Teachers’ Retirement System, and the $254.8 billion New York State Common Retirement Fund) recently backed the replacement of several directors of Exxon Mobil Corp. to promote the energy transition and address the risks of climate change in its business plan.

Texas, however, which has one of the largest U.S. public pension funds, has recently enacted legislation that prohibits Texas public pensions from investing in companies that divested in fossil fuels or had other restrictions on the oil and gas industry.


On the other hand, private retirement plans, which are governed by the Employee Retirement Income Security Act of 1974 (ERISA), have been subjected to differing political views in pronouncements by previous administrations regarding ESG factors in investments.

Under the prior administration, the Financial Factors in Selecting Plan Investments rule became final and required the fiduciaries of private pensions subject to ERISA to only consider financial factors in making investment decisions and not non-pecuniary factors, which could include ESG factors.

To satisfy ERISA’s fiduciary duties and responsibilities, the guidance provided that plan fiduciaries are not permitted to subordinate economic interests for policy goals such as ESG when making investment decisions.

Also, the U.S. Department of Labor started investigating private pension investments in furtherance of the prior administration’s Executive Order Promoting Energy Infrastructure and Economic Growth, which sought to remove ESG considerations from the investment decision making process that may lead fiduciaries to invest in renewable energy instead of coal, oil and natural gas.

The current administration has taken an opposite approach and appears to be embracing consideration of ESG factors including climate related risks. On President Biden’s first day in office, he issued Executive Order Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis, which directed all departments and executive agencies to review action taken by the prior administration that conflicts with national priorities and take action to conform it to the order. The accompanying Fact Sheet, specifically provides the Financial Factors in Selecting Plan Investments rule is to be reviewed.

The DOL released a statement that it will not enforce the final rule on Financial Factors in Selecting Plan Investments or pursue enforcement action against any plan fiduciary based on a failure to comply with that final rule. That rule, however, is still effective.

On May 5, Biden issued an Executive Order on Climate- Related Financial Risk which included a section on Resilience of Life Savings and Pensions. Pursuant to this order, the DOL was directed to identify actions that can be taken under ERISA to protect the life savings and pensions of U.S. workers and families from the threats of climate-related financial risk.

The order also provided that the DOL consider publishing, by Sept. 20, a proposed rule for notice and comment, to suspend, revise or rescind the Financial Factors in Selecting Plan Investments rule. The DOL was further directed to review, consistent with ERISA, how the Federal Retirement Thrift Investment Board has considered ESG factors including climate-related financial risk factors when making investment decisions.

Action on Federal Legislation

As we await further guidance from the DOL, companion bills were introduced in the House (H.R. 3387) and Senate (S. 1762) to amend ERISA, titled the Financial Factors in Selecting Retirement Plan Investments Act. These bills would revoke the prior administration’s Financial Factors in Selecting Plan Investments rule. In addition, it would allow plan fiduciaries to consider ESG, or similar factors in making its investment decisions provided that considering those factors is consist with their fiduciary duties under ERISA.

It would also allow ESG factors to be considered as a tie-breaker when considering competing investments that provide similar economic results without requiring greater documentation of that decision making process. In addition, under the proposed law, investments including ESG factors could be a default investment or a component of a default investment under an ERISA plan.

To provide investors with a company’s ESG information, the House recently passed the Corporate Governance Improvement and Investor Protection Act (H.R. 1187). The law, if enacted, would require public companies to disclose in their financial statements their ESG metrics in relation to their long-term business plans.

What’s at Stake

It is reported that at the end of the first quarter of 2020, total U.S. retirement plan assets stood at $28 trillion. With access to additional investments from private retirement funds hanging in the balance for energy companies, the upcoming guidance on ESG factors in investments of ERISA retirement plans will be important to the energy industry.

As demand for ESG-focused investments continues to grow, the need for more detailed ESG and sustainability information, and a framework for investors, is clear. Whether the House bill, H.R. 3387, or the Senate bill, S. 1762, will be passed is unknown. However, the DOL was directed to consider publishing, by September, for notice and comment, a proposed rule to suspend, revise, or rescind the prior administration’s Financial Factors in Selecting Plan Investments rule.

Any such new guidance from the DOL, however, would still need to comply with the requirements of ERISA.

This column does not necessarily reflect the opinion of The Bureau of National Affairs,Inc. or its owners.

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Author Information

Candace L. Quinn is senior counsel in the Employee Benefits department in the New York office of Seyfarth Shaw LLP. She is an executive compensation and employee benefits attorney with significant international and domestic experience and LLMs in Energy and Tax.

Linda J. Haynes is a partner in the Employee Benefits department in the Chicago office of Seyfarth Shaw LLP. She advises clients on complex and ever-evolving ERISA fiduciary matters that affect plan fiduciaries.

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