It appears the Department of Labor’s environmental, social, and governance (ESG) rule will hinge on the outcome of the recount of the Senate race in Georgia.
The Wall Street Journal noted over the weekend that a Senate controlled by Republicans block Democrats from using of the Congressional Review Act to certain rules, and it uses the DOL rule, finalized at the end of October, as an example.
The final rule amends the department’s investment duties regulation, first issued in 1979, to make a regulatory structure for considering investments for ERISA plans clear.
The amendments require plan fiduciaries to select investments based on “pecuniary factors,” or those that the fiduciary believes will have an impact on the risk and/or return of an investment, not its social and environmental impact.
“This shouldn’t be controversial,” the paper noted. “The Supreme Court unanimously ruled in Fifth Third Bancorp v. Dudenhoeffer (2014) that ERISA’s reference to benefits signifies ‘financial’ rather than ‘nonpecuniary’ benefits. For example, a fiduciary can’t invest employees’ retirements exclusively in their own employer’s stock if the ‘financial goals demand the contrary,’ Justices explained.
“A fiduciary also can’t invest retirement assets only in companies with low carbon emissions or racially diverse workforces when these aren’t linked to financial returns,” the Journal added. “The Labor rule clarifies that financial factors are those that have a “material effect on the return and risk of an investment.”
Industry opposition
The reason asset managers oppose the new rule, it argued, is because they want to use worker retirements to promote their own political and financial interests.
“They want to charge higher fees for managing ESG funds even if they don’t produce better financial returns for beneficiaries. The DOL rule forbids them from doing that. Kudos to Labor Secretary Gene Scalia for standing up to these Wall Street complaints.”
The DOL issued a proposed rule in June, which took a stricter stance on the inclusion of ESG investments in retirement plans, that quickly drew condemnation from ESG advocates, consumer groups, and high-profile politicians.
Appearing on the 401(k) Specialist Pod(k)ast in mid-October, former EBSA head Preston Rutledge predicted the rule’s passage.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
