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Call it a comeback: the likely returns of ESG investing in ERISA accounts

Environmental, social and governance (“ESG”) investing has gone through quite a regulatory rollercoaster in recent years.

In the most recent turn, Democratic Senators Patty Murray (D-Wash.) and Tina Smith (D-Minn.), along with Representative Suzan DelBene (D-Wash.), introduced a bill expressly permitting ESG investment in pensions.

bills, a 180-degree turn from policies on ESG investments by the end of the Trump administration.

If passed, the proposed law would effectively give ESG criteria equal status to market decision-makers and allow ESG investments to be incorporated into standard pension funds.

The Bill

The Financial Factors in Selecting Retirement Plan Investment Act (so named for the Trump-era rule it actually ignores) was enacted in late May 2021.

This proposed law would amend the Employee Retirement Income Security Act of 1974 (“ERISA”) to allow pension fund managers to consider ESG criteria when selecting investments, as well as to consider such criteria as the deciding factor when choosing between potential investments.

with the same probable return and the same risk. The bill’s sponsors point to growing interest in ESG investing and the need for Congress to provide legal certainty about the ability of pension plan fiduciaries to invest in ESG funds.

A Change of Course

If passed, this bill would reverse the Trump administration’s controversial Department of Labor (“DOL”) rule that severely limited investors’ ability to consider ESG criteria in most retirement investments and thus effectively prevented ESG investments from being included in such portfolios.

That rule, pushed through the notice and comment period at a remarkable pace, made several significant changes to ERISA. Despite receiving very little support and in fact overwhelming opposition in that short period of regulation, the rule became final in November 2020.

However, the DOL’s Employee Benefits Security Administration (“EBSA”) indicated earlier this year that it would not enforce the Trump administration’s final rules.

On taking office, the Biden administration said it would address the Trump-era rule immediately, and in March EBSA indicated that plan managers could once again consider ESG criteria when selecting investments for retirement plans without fear of enforcement. the rules of the Trump administration.

Nevertheless, the lack of clear guidance has created some ambiguity that the Financial Factors in Selecting Retirement Plan Investment Act will hopefully serve to clarify so that plan managers can freely consider ESG factors in investment decisions.

A Path to Some Certainty?

The appropriateness and encouragement of ESG investing varies widely from administration to administration.

Because this area of ​​investing has been legally uncertain for so long, ESG investing is not always the focus of ERISA accounts.

However, the proposed bill would bring about a much faster and more decisive policy change on ESG investing, allowing not only ESG criteria to be considered by plan fiduciaries and used as tie-breakers, but also to consider ESG criteria.

for qualified standard investment alternatives. However, the road to the passage will not be easy. Republican senators, many of whom supported the Trump-era DOL rule, are likely to oppose the bill and make the road to enactment extremely rocky.

However, proponents of the bill have consistently argued that ESG-related criteria are relevant to corporate and investment performance, and that those who properly manage material risks arising from ESG concerns will perform best.

As such, supporters of the bill argue that a prudent investor should consider ESG criteria when investing, as climate change and other significant threats can seriously impact a fund’s long-term performance.

What is clear at this point is that the passage of the Financial Factors in Selecting Retirement Plan Investment Act would make such consideration much easier for the fiduciaries of ERISA plans and therefore would promote ESG investing in general, which continues every year. rise.