“We finally got the ESG proposed rule we’ve been waiting on for a very long time,” American Retirement Association (ARA) CEO Brian Graff said Wednesday afternoon during his Washington Update session at the LeafHouse National Retirement Symposium (LNRS) in Austin, Texas.
The Department of Labor announced the rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” earlier in the day.
It directed the federal government “to implement policies to help safeguard the financial security of America’s families, businesses, and workers from climate-related financial risk that may threaten the life savings and pensions of U.S. workers and families,” according to the DOL.
“The Trump administration put out a rule meant to quantify all of the various ESG-related guidance up until now,” Graff explained. “But the preamble had a chilling effect on ESG’s use. No one really understood what it meant by ‘pecuniary factors.’ I told the DOL that if a plan sponsor has to hire a lawyer before making an investment, that’s not a good thing.”
Member companies of the Plan Sponsor Council of America (PSCA), one of five industry organizations under the ARA umbrella, went further in recent focus groups to specifically mention litigation fears.
ADDITIONAL LINKS: New ESG Guidance from DOL Seeks to Reverse ‘Chilling Effect’ of Trump-Era Rules
“They told us that’s it’s not just hiring a lawyer before investing, it’s that they didn’t want to do anything even remotely edgy in their plans for fear of being sued,” Graff added.
The new proposed rule is worded in a way that gets rid of pecuniary factors. Harvard Law School defines them as “factors that a fiduciary prudently determines will have a material effect on the risk or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policies.”
“These are long-term investment funds, but [today’s announcement] is significant and game-changing.
Brian Graff
“The playing field is now leveled to include ESG and such things as climate risk, diversity and inclusion initiatives, and others to the point where advisors will be asked if they are considering these factors,” Graff predicted. “It’s proposed at this point, but I think that will happen.”
While the Trump Administration’s directive had a chilling effect, this gives investment managers the green light on ESG.
“What I don’t want to happen is to ping-pong back and forth and in 2025 have a possible new administration reversing it again,” he concluded. “These are long-term investment funds, but [today’s announcement] is significant and game-changing. I think this proposed rule will pass pretty much intact.”