DOL’s proposal may encourage pension plan investors to consider environmental and social factors

A regulatory effort under the radar could encourage investors to change the way they assess the risk of investments by private sector employee benefit plans governed by the Employees Retirement Income Security Act of 1974.

In January, President Joe Biden issued a decree directing departments and executive agencies to review federal regulations that conflicted with the federal government’s mission to “advance environmental justice”, with a particular focus on climate change.

One of these agencies, the Employee Benefits Security Administration of the United States Department of Labor, took action on Biden’s orders by deciding not to apply a Trump administration rule this would have required benefit plan trustees to “select investments and investment action plans solely on the basis of financial considerations relevant to the risk adjustment economic value of an investment or specific investment action plan ”.

The Trump-era rule, adopted by EBSA in November 2020, particularly sought to answer the upward trend in investment decisions that take into account so-called “ESG” factors, or environmental, social and governance factors. Specifically, the Trump administration clarified that “regime assets can never be enlisted in the pursuit of other social or environmental goals to the detriment of ERISA’s fundamental goal of providing secure and valuable benefits.”

The 2020 rule recognized cases where ESG factors could present a business risk or an economic opportunity that the Trustees may appropriately treat as material economic considerations. But various stakeholders in the benefits community have had a negative response to the rule’s treatment of these factors, according to Ali Khawar, acting deputy secretary of EBSA.

In a November 17 webinar presented by sustainability organization Ceres, Khawar discussed the Biden administration’s rationale and process for revoking the 2020 rule as well as the publication of its Rule proposed October 14 that would amend EBSA regulations to clarify, among other things, that plan trustees may need to assess the economic effects of climate change and other ESG factors to determine a portfolio’s projected performance against targets plan funding.

Khawar said regulators were seeking to involve a wide range of stakeholders in shaping the new regulations, including investor advocates, problem advocates, labor unions, plan sponsors, corporations, trust companies and others. plan advisers, among others. “A lot of our approach to this issue has been to talk to the people who are on the front lines and to do a lot of listening,” he added. “It was remarkable how consistent what we heard from stakeholders was. “

Specifically, Khawar said that while some stakeholders believed the Trump administration’s rules on ESG factors were taking a middle-ground approach to the problem, “it continued to have a chilling effect on investor behavior.” In other words, stakeholders were considering taking climate change and other ESG factors into account in their decision-making processes, but the 2020 rule either halted those efforts or canceled them, Khawar said.

Khawar said the new rule seeks to clarify that ESG factors are no different from other considerations investors may have; “When it comes to ESG factors, they’re really no different from anything important. There are times you take them into account and times you shouldn’t.”

“It’s a very context-specific analysis, but we really don’t think we should put our finger on the scales and say ‘you really shouldn’t be doing this’,” he continued.

Public comments on the proposed rule are expected on December 13, and Khawar said EBSA welcomes constructive contributions, especially with regard to evidence of the importance of ESG factors and relevant research to which stakeholders are concerned. think the agency should pay attention.

EBSA is also seeking feedback on the reluctance of plan sponsors to embrace ESG factors, noted Khawar, and how stakeholders deal with a “tiebreaker”. This term refers to a situation in which investors must choose between several options that have an equivalent impact on the needs of a portfolio.

“What we said in our NPRM is that once you’re at this point and you choose between equivalent options, we haven’t really put a lot of restrictions on how you choose at that. stadium, ”Khawar said. “It could be anything. It could be ESG factors, it could be something that is not an ESG factor.” The agency also asks stakeholders if there are certain parameters that it should consider putting in place around the tie-breaking decisions.

But when it comes to ESG factors in particular, Khawar said EBSA is not taking what he described as a “more aggressive approach” in telling investors what factors to consider in their investment decisions. ‘investment.

“Regardless of your perspective on ESG issues, as something is financially important, everyone should agree that getting better returns for retirement savers – that’s a good thing,” he said. he continued. “And that’s what I think the rule tries to focus the conversation on.”

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