The Department of Labor will not enforce a Trump administration rule that made it harder for fiduciaries to use environmental, social or governance (ESG) factors and investment funds in retirement plans, the department announced Wednesday.
Additionally, the DOL will not enforce a Trump-era rule that limited proxy voting by a plan's fiduciaries on shareholder proposals that advanced ESG proposals unless a financial benefit could be demonstrated.
The DOL intends to revisit both rules.
Ali Khawar, the principal deputy assistant secretary for the DOL’s Employee Benefits Security Administration, said the department would “conduct significantly more stakeholder outreach” when crafting new rules to balance the need for ESG integration and fiduciary obligations.
“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 exercise of shareholder rights,” Khawar said.
The rule, which was finalized on October 30 of last year, restricted ESG-focused investment vehicles and risk analysis in private retirement plans, requiring that sponsors demonstrate the investments do not take on more risk or sacrifice returns. Former DOL Secretary Eugene Scalia framed the rule as ensuring that fiduciaries were focused on plan participants’ financial interests as opposed to “non-pecuniary goals or policy objectives.”
The final rule softened the language from its earlier proposal, removing the term “ESG” from the rule itself. Indeed, the rule came under harsh criticism during its comment period; according to a US SIF/Morningstar study of public comment responses, 96% of individual commenters, 85 out of 86 asset managers and 44 out of 46 financial advisors opposed the rule. Critics argued that ESG risk analysis could not necessarily be separated from assessing the health of a business and that fiduciaries should be able to consider all factors.
According to a DOL statement on the nonenforcement, many questioned whether the rule-making process was “rushed unnecessarily,” and thus failed to consider whether ESG considerations improve investment value.
“The department has also heard from stakeholders that the rules, and investor confusion about the rules, have already had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules can be read to explicitly allow,” the statement read.
There were indications that the DOL’s ESG rule was likely to be reconsidered or overturned even before Joe Biden was inaugurated as the nation’s 46th president; for one, it was the only DOL rule listed for review by the new president’s transition team.
Aron Szapiro, the head of policy research at Morningstar, said he viewed the news as “unambiguously good” and was happy to see that the DOL acknowledged what he saw as the rule’s “chilling effect,” particularly on risk-averse fiduciaries and investors. He speculated that the Biden administration’s approach could potentially mirror 2015-era guidance from the Obama administration that fiduciaries and funds could consider ESG factors.
“To the extent you select funds based solely on performance, it’s not necessarily going to be surprising that many funds integrate ESG strategies,” he said.
Sen. Patty Murray (D-Wash.) who chairs the Senate Health, Education, Labor and Pensions Committee, called the announcement a win for "everyone," including investors, retirees and the environment.
"Financial security is about planning for the long term, and the Trump administration's requirement that people doing that ignore environmental, social and governance criteria made about as much sense as telling someone planning a trip they can't look at a map," she said.