A pendulum is defined as something that moves from one position to the opposite extreme and back again. It can also describe the US Department of Labor’s ERISA policy around ESG.
The policy under the Biden Administration has shifted to a green light for advisers to pursue ESG investments in ERISA plans as seen in a new DOL proposed rule. The proposal would dramatically reverse the Trump Administration’s position that was seen to discourage ESG investing (according to affiliate publication Regulatory Compliance Watch).
“The Department is concerned that the current regulation has created a perception that fiduciaries are at risk if they include any ESG factors in the financial evaluation of plan investments,” reads the proposal.
The DOL would revise ERISA rule 404a-1 (investment duties) to state that a “prudent fiduciary” may consider ESG in her “risk return analysis” of an investment. The proposed new rule even includes ESG examples, such as: a corporation’s “physical and transitional risks of climate change;” a board’s executive compensation; and a workplace’s diversity.
The “proposal makes clear that climate change and other ESG factors are often material and that in many instances fiduciaries to [SIC] should consider climate change and other ESG factors in the assessment of investment risks and returns,” according to the DOL.
There are economic consequences to “extreme weather,” which can disrupt “productivity and supply chains.” In addition, “severe droughts, wildfires, and flooding are expected to continue to pose a threat to investments far into the future,” the proposal reads.
The proposal also would rescind a Trump-era rule mandating documentation specific to ESG. The new proposal believes such an approach could “chill” investment managers pursuing such investments.
The proposal includes some definitions, but one you won’t find in the rule is a definition of ESG.
You have until December 13 to comment on the proposal.
The regulatory pendulum swings both ways. The Trump Administration largely scuttled the Obama Administration’s DOL fiduciary duty rule, so perhaps the final chapter on the DOL’s ESG stance has yet to be written.