DOL proposes new ESG rule after abandoning Trump-Era version

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According to a securities attorney’s interpretation of the proposed new rule by the U.S. Department of Labor, trustees will likely need to consider risks associated with climate change and environmental, social and governance risks when selecting candidates. investments and the formulation of recommendations for pension plans.

The proposed new rule, titled “Prudence and loyalty in selecting plan investments and exercising shareholder rights,” follows the Biden administration’s decision not to apply those finalized under the Trump administration, according to Ali Khawar, secretary Acting Assistant to DOL’s Employee Benefits Security Administration. He argued that the previous rules created a “chilling effect” on ESG investments and that its reversal would boost workers’ retirement savings and pensions.

“A main idea behind the proposal is that climate change and other ESG factors can be financially significant and when they are, considering them will inevitably lead to better risk-adjusted returns in the long run, protecting savings- retirement of American workers, ”Khawar said. .

In March, the DOL revealed it would not enforce the Trump administration’s ESG rule. The Trump-era rule, which was initially finalized in October last year, has reduced the ability of pension trustees to consider ESG investment vehicles and risk analysis in plans private pensions.

Former DOL secretary Eugine Scalia argued at the time that the rule was in place to ensure that trustees did not focus on “non-cash” goals or policies, but Scalia’s approach was not particularly popular. According to a US SIF / Morningstar study of public responses, 96% of individual commentators, 85 of 86 asset managers and 44 of 46 financial advisers opposed the rule. At the time, critics argued that ESG considerations couldn’t (and shouldn’t) be separated from the health and stability of a business.

Supporters of the new rule hailed the change, with American sane Patty Murray (D-Wash.) And Tina Smith (D-Minn.) (Respectively chair and member of the Senate Committee on Health, Education, work and pensions) arguing that it was “common sense” for ERISA trustees to be allowed to weigh ESG factors when reviewing investment strategies.

“The Biden administration’s move to recognize this reality is a victory for workers, retirees, investors, businesses, communities, the environment, everyone,” they said in a statement. “This new rule will help build a future for families that is fairer, more diverse, more sustainable and more financially secure. “

George Michael Gerstein, co-chair of fiduciary governance and environmental, social governance and governance at law firm Stradley Ronon, said the new rule largely mirrored previous DOL guidelines (and in particular reflected the ESG guidelines of the Obama administration), while preserving certain attributes of the rule of the Trump era.

But Gerstein discovered that one aspect of the new rule could have significant consequences for ERISA trustees. For Gerstein, the new rule clarified that government action through regulation or rule making to address ESG issues such as climate change could impact whether or not something is important. For Gerstein, this aspect of the rule could inspire a “presumption” among trustees and is considering taking ESG into account, even if it doesn’t force him to do so. Gerstein felt that the rule would indeed instill such a presumption in favor of balancing climate change issues as material.

“If this rule is passed, I wouldn’t be surprised if various trustees would say, ‘this rule is enough that I’m going to take into account (ESG), because I think my legal risk is greater if I don’t act on it. that if I do, ”Gerstein said.

According to Aron Szapiro, head of retirement studies and public policy for Morningstar, said the central premise of the new rule would allow employers to use investments with ESG considerations as the default for workers automatically enrolled in a plan, qualifying this decision of “key to integrating ESG”. Morningstar (which previously argued against the Trump-era rule) announced that Morningstar Investment Management and Plan Administrators, a pension plan administrator, intends to offer the first group employer plan for the industry which would be “intentionally designed” to limit exposure to ESG risks, with a launch date scheduled for early 2022.

Szapiro speculated that at first most people wouldn’t even notice the DOL rule change if it was finalized, but over time he expected more investment managers to move towards integration of ESG risk assessment when weighting long-term returns.

“In addition, participants who so wish may be in a better position to choose funds with specific ESG objectives,” he said. “None of this is going to happen overnight, but this new regulation will begin to encourage employers to consider ESG in their investment choices.”

The Investment Adviser Association welcomed the new direction, according to Associate General Counsel Sarah Buescher, echoing Khawar’s concerns about the chilling effect of previous rules, and said investment advisers were happy with the recognition by the DOL that ESG factors could be considered important.

“What we heard from members is that, especially integrating ESG factors, it becomes part of the investment process, and the previous rule didn’t really recognize that point,” she said. declared. “The direction in which they are now going is doing it.”

The public comment period for the proposed rule will last for 60 days and is expected to be finalized “more or less in this form” by early next year, Szapiro said.


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