We previously wrote about the Biden administration's decision to forego enforcement of Trump-era rules from the Department of Labor (DOL) mandating that fiduciaries select investments and investment courses of action based solely on consideration of “pecuniary” (i.e. financial) factors - which was widely seen as a bar to ESG investing by pension funds.
A new proposed rule from the DOL now gives a clear green signal to funds considering ESG investments: “if a fiduciary prudently concludes [that] climate change and other ESG factors are material to an investment or investment course of action under consideration, the fiduciary can and should consider them and act accordingly, as would be the case with respect to any material risk-return factor.”
The proposed rule also sets out a list of ESG factors which could properly be considered:
"(i) climate change-related factors, such as a corporation’s exposure to the real and potential economic effects of climate change, including exposure to the physical and transitional risks of climate change and the positive or negative effect of Government regulations and policies to mitigate climate change;
(ii) governance factors, such as those involving board composition, executive compensation, transparency and accountability in corporate decision-making, as well as a corporation’s avoidance of criminal liability and compliance with labor, employment, environmental, tax, and other applicable laws and regulations; and
(iii) workforce practices, including the corporation’s progress on workforce diversity, inclusion, and other drivers of employee hiring, promotion, and retention; its investment in training to develop its workforce’s skill; equal employment opportunity; and labor relations."
The proposed rule also sets out amendments that could facilitate more active involvement by funds in proxy voting, particularly on ESG issues.
Read the text of the proposed rule here.
Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar, said: “The proposed rule announced today will bolster the resilience of workers’ retirement savings and pensions by removing the artificial impediments – and chilling effect on environmental, social and governance investments – caused by the prior administration’s rules. A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”