The Biden administration is proposing to roll back Trump-era rules seen as restricting socially conscious investing.
The Department of Labor will propose rule changes Wednesday that would make it easier for retirement plans to add investment options based on environmental and social considerations — and allow such options to be the default for enrollees.
In a reversal of a Trump-era policy, the Biden administration’s proposal makes it clear that pension plan administrators should not only consider environmental and social factors, but it may also be their duty to do so — especially as the economic impacts of climate change continue to materialize. to appear.
Martin J. Walsh, the Secretary of Labor, said the department consulted consumer groups, asset managers and others before writing the proposed rule, and the change was deemed necessary because the old one appeared to have a “chilling effect” on the use of environmental, social and governance factors when evaluating investments.
“If these legal concerns kept fiduciaries on the sidelines, it could mean worse outcomes for employees and retirees,” Mr Walsh said in an interview.
The new regulations would also allow funds with environmental and other concerns to become the default investment option in retirement plans like 401(k)s, which the previous administration’s rules had banned. But the rule would not allow plan overseers to sacrifice returns or take greater risks when analyzing potential investments with a focus on environmental, social and governance factors, known as ESG, Labor Department officials said.
Under the Employee Retirement Income Security Act of 1974, known as ERISA, pension plan administrators must act solely in the best interests of plan participants. Environmental, social and governance investments are permitted, but only if they are expected to perform at least as well as alternatives with comparable risk levels.
That has come to be known as the “tiebreaker” or “all things equal” norm, a guiding principle that has basically remained the same by the Republican and Democratic governments, although they have interpreted it differently.
The proposed change would allow plan managers to factor ESG factors into their initial analysis of investments rather than just at the end — a change that Labor Department officials say still upholds that principle, as managers are still not allowed to return. sacrifice for those kinds of additional benefits.
For example, the proposed rule said that accounting for climate change, “such as by assessing the financial risks of investments for which government climate policies will affect performance,” can benefit pension portfolios by reducing longer-term risks.
“If an ESG factor is material to the risk-return analysis, we believe that fiduciaries should consider it,” said Ali Khawar, an acting deputy secretary in the department, said in an interview. “That weighs differently than it did five or ten or fifteen years ago,” he said, given the proliferation of data quantifying the risks of ignoring ESG and the benefits of taking it into account.
The asset class has grown significantly in recent years. Total assets in ESG funds rose to $17.1 trillion in early 2020, a 42 percent increase from early 2018, according to the U.S. SIF, a nonprofit focused on sustainable investing. That investment total represents one in three dollars under professional management.
Only a small proportion of those investments are in the hands of pension plan investors, according to a US SIF report, even as interest is rising, especially among younger investors.
The Biden administration has also proposed changes that would reverse another Trump-era rule requiring pension plan administrators to consider a complex list of principles before casting proxy votes on shareholder proposals, which may have discouraged plans from voting at all. If fiduciaries decide to vote, and the rule makes it clear that this is not required, they should only support causes and causes that are in the financial interest of the plan.
The proposal would remove that language, Labor Department officials said, and largely allow them to decide when “it is or is not appropriate to act,” Mr Khawar said.
The Biden administration had already announced its plans: Just two months after the Trump-era rules came into effect in January, the Biden administration said it would not enforce them and a new proposal would come.
Stakeholders have 60 days after the proposal is published in the Federal Register to comment. A final settlement is usually issued after the department has reviewed the comments.