President Biden and congressional Democrats are moving to overturn Trump-era rules intended to make environmental, social and corporate governance (ESG) investing and proxy voting more difficult. A new executive order (EO 14030) on climate-related financial risk directs the Department of Labor (DOL) to quickly consider rescinding, suspending or amending two controversial 2020 regulations for fiduciaries selecting plan investments and exercising proxy and other shareholder rights. On the same day President Biden issued the EO, Senate and House Democrats introduced legislation to let ERISA-governed retirement plans consider ESG factors.
The new EO urging DOL action to undo the Trump-era fiduciary rules on plan investments and proxy rights comes two months after the agency announced a nonenforcement policy for both regulations. The Biden administration included the rules on its list of agency actions under review for consistency with the president’s climate change agenda.
The rules require fiduciaries to make investment and shareholder decisions based on pecuniary factors, without sacrificing investment returns or otherwise subordinating participants’ interests to further nonpecuniary goals. Although the rules don’t prohibit fiduciaries from considering ESG factors when making investment or shareholder decisions, the rules’ preambles caution fiduciaries against concluding too hastily that ESG factors are pecuniary or taking an overly expansive view of what issues are in a plan’s economic interest.
The EO says climate change threatens the US financial system and Americans’ financial security, so DOL (and several other agencies) need to consider ways to mitigate this threat. In addition to revisiting the rules on selecting plan investments and exercising shareholder rights, the order directs DOL to identify other actions it can take to protect pensions and retirement savings from climate-related financial risk. By Nov. 16, DOL must report to the president on any actions taken in response to the order.
The Financial Factors in Selecting Retirement Plan Investments Act (HR 3387) would formally repeal the rule on selecting plan investments and amend ERISA to state explicitly that plan fiduciaries may consider ESG factors in making investment decisions. Fiduciaries could also consider collateral ESG factors as tiebreakers when deciding between otherwise comparable investment options. When selecting funds that use ESG factors, fiduciaries would not have to maintain any additional documentation and could designate such funds as qualified default investment alternatives.
The bill, sponsored by Senate Health, Education, Labor and Pensions Committee Chair Patty Murray, D-WA, Sen. Tina Smith, D-MN, and Rep. Suzan DelBene, D-WA, may not be able to overcome Republican opposition. The proposal nonetheless provides important support for the Biden administration’s efforts.