Last October, the Department of Labor (DOL) implemented its rule for limiting ERISA retirement plans from considering “non-pecuniary” factors in investment offerings for investors—something many saw as a thinly veiled attack on ESG investing as a whole. (See: The DOL Missed The Boat As The ESG Tide Continues To Rise.)
Prior to the rule taking effect, over 94% of the almost 8,700 comments filed to the DOL opposed the proposal of the rule, as investors and asset managers made the most obvious point: ESG factors are pecuniary factors; the way companies manage risk and seek opportunity related to environmental, social, and governance issues have a clear and increasingly measurable effect on financial outcomes.
Despite the overwhelming lack of support, the DOL moved forward with the rule’s implementation. Why? Because an administration in fierce opposition to a rising tide toward renewable energy empowered an arm of its government to act as a seawall, putting up sandbags instead of getting on the boat and helping to steer. They perpetuated myths and sowed confusion rather than stepping up to lead a conversation and move the industry closer to consistency, transparency, and truth.
That was then.
Now, a new administration has begun to examine federal regulations implemented during the Trump presidency. As part of an executive order President Joe Biden issued on his first day in office, federal agencies must review rules that may be antithetical “to promote and protect public health and the environment.”
As a result of this broad effort, the DOL just announced it will opt to not enforce its latest rule, and we expect the DOL will likely embark on a more formal process to repeal or rewrite the rule in the future. In a statement, principal deputy assistant secretary for the Employee Benefits Security Administration (EBSA) Ali Khawar explained, in part:
“These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights.”
The agency now plans “to determine how to craft rules that better recognize the important role that environmental, social and governance integration” can play.
The move suggests a more fundamental shift away from the putting-up-a-seawall approach of the previous administration and toward a steering-the-boat approach, guiding market participants on how they can and should implement ESG properly (while working to eliminate real issues like greenwashing), rather than fighting the tide altogether.