There have been several recent policy initiatives with respect to ERISA fiduciary policy on environmental, social, and governance (ESG) investing in retirement plans.
We briefly summarize three of them below.
Biden Executive Order
On May 20, 2021, President Biden issued an Executive Order on Climate-Related Financial Risk. Included in the EO was an instruction to DOL to identify actions that DOL can take under ERISA “to protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk” and consider proposing an amendment to ERISA fiduciary regulations suspending, revising, or rescinding the Trump DOL’s Financial Factors in Selecting Plan Investments regulation.
That regulation is also the target of two bills recently introduced in Congress.
Legislation introduced to authorize ESG investments and repeal DOL’s ESG regulation
Also on May 20, 2021, Senators Murray (D-WA) and Smith (D-MN) and Representative DelBene (D-WA) introduced the Financial Factors in Selecting Retirement Plan Investments Act.
This bill would repeal the (Trump) DOL’s Financial Factors in Selecting Plan Investments regulation and would amend ERISA’s fiduciary rules to provide that:
A fiduciary could consider ESG factors in connection with investment decisions and could consider collateral ESG factors as investment tie-breakers.
A fiduciary would not be required to maintain any greater documentation/substantiation/justification of such ESG-based decisions.
The fiduciary rules would not preclude the selection of an ESG investment as a default investment/component of a default investment under DOL’s qualified default investment regulations.
Legislation introduced authorizing a “sustainable investment policy”
On May 27, 2021, Representatives Levin (D-MI), Boyle (D-PA), Axne (D-IA), and García (D-IL) re-introduced the Retirees Sustainable Investment Policies Act. The latest discussion draft of this legislation provides:
Plan must adopt a sustainable investment policy (SIP) or disclose that it has not: The bill would amend ERISA to require that each plan either provide a SIP addressing sustainability considerations or give notice to participants in writing of its election not to adopt a SIP. The plan’s SPD would have to include a statement of whether or not the plan has adopted a SIP. The SIP may be incorporated into an existing investment policy, or the plan may elect to be governed by a SIP of a third-party fiduciary.
Definition of a sustainable investment: “Sustainable investments” broadly include investments made based on ESG and/or economically targeted investment (ETI) factors (“sustainability considerations”). Sustainability considerations with respect to specific companies/funds in which the plan invests include:
Economically targeted investment (ETI) considerations including: local job creation; community economic development; and affordable and workforce housing construction.
Social considerations including: workforce characteristics such as compensation and benefits, health and safety, diversity and demographics, skills and training, retention and turnover, full-time and part-time employment, and the use of independent contractors; labor and human rights compliance, workers’ freedom of association, the right to collectively bargain, and the prevention of employment discrimination, child labor, and forced labor in company operations and supply chains; due diligence and practices regarding supply chain management; and implementation of diversity and inclusion in the workforce, senior leadership, business procurement, and philanthropy.
Environmental considerations including: reduction/elimination of net greenhouse gas emissions and mitigation of exposure to climate-related risks; mitigation of “environmental harms and risks” such as pollution, habitat destruction, deforestation, species endangerment/extinction; addressing/rectifying issues of environmental justice and the inequitable environmental impacts on historically disadvantaged communities; and the potential to provide workers affected by the shift to a low carbon economy “with a just transition by creating decent work and quality jobs.”
Governance considerations including: executive compensation, board diversity, worker board representation and codetermination, the independence of board chairs, political spending and lobbying disclosure; and international tax avoidance strategies and tax payment disclosure.
The plan’s SIP would have to be reviewed annually.
Revision on ESG rule
Finally, the bill would amend ERISA’s fiduciary rules to provide that a fiduciary would not be prohibited from:
Choosing among financially comparable investments based on sustainability “tie breakers,” regardless of whether they are determined to be financially material. Whether alternative investments are “financially comparable” would use a standard based on the decision “a prudent man acting in like capacity and familiar with such matters could reasonably be expected to make on a forward-looking basis.”
Monitoring/disposing of investments based on sustainability considerations.
Voting proxies in accordance with the plan’s proxy voting guidelines, which may include sustainability considerations.
Considering (as financially material) the potential for increased contributions to the plan resulting from a plan investment.
With respect to the inclusion of ESG/ETI investments in DC plan fund menus, a plan investment may be selected in part based on sustainability considerations (as above, regardless of materiality and subject to the “prudent man” standard).
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In the current political situation, Senate Republican opposition is likely to stymie action on either of the two legislative proposals discussed above, making DOL action (modifying the Trump ESG regulation) the most likely of these three initiatives to actually become law.
We will continue to follow this issue.