Employers Can Expect ESG Guidance From New Administration

Clarification on the final rule is expected at some point in the first half of 2021, experts say.

A new presidential administration, along with key changes in regulatory leadership, could drive more interest in environmental, social and governance (ESG) investing in retirement plans and could mean there will be updated guidance on recent rules.

While a complete revamp of the final rule on ESG investing—which says fiduciaries must only use “pecuniary” factors in the assessment of investment options within tax-qualified retirement plans—isn’t expected anytime soon, it is likely that the Biden administration will release additional guidance or clarification on the final rule, says Aron Szapiro, head of policy research at Morningstar.

“The immediate thing is going to be regulatory guidance, like a field assistance bulletin around enforcement or a FAQ on pecuniary and non-pecuniary issues,” he says. Szapiro anticipates clarification to be released in the first half this year, with the possibility of a new rule in 2022. 

With a new administration and new Congress come key changes in leadership positions. The recent announcements that President-elect Joe Biden will nominate Marty Walsh to be secretary of labor and Gary Gensler to be chair of the Securities and Exchange Commission (SEC) renewed hopes that some retirement plan experts have for ESG investing, especially after years of silence from the Trump administration on sustainability.

Walsh has supported initiatives on ESG investing in the city of Boston, and he committed an additional $50 million to such investments in December. The commitment brought Boston’s total investment in the city’s ESG Investment Initiative to $200 million.

Other announcements, including who will be nominated to lead the Employee Benefits Security Administration (EBSA) and who will chair the Senate Health, Education, Labor and Pensions (HELP) committee, are also expected to result in favorable outcomes for ESG investing.

Ed Farrington, executive vice president, institutional and retirement business, for Natixis Investment Managers, says he anticipates that Senator Patty Murray, D-Washington, who currently serves as ranking member for the HELP committee, will take over as chair. “You can imagine if you change the leadership of that committee, and therefore what issues will be brought to that debate, you can assume that Senator Murray will be more likely to be supportive of ESG investing going forward,” Farrington notes.

Leadership changes at the Senate, Department of Labor (DOL), SEC, EBSA and the HELP committee will likely lead to new guidance on the final ESG rule, providing potential relief to employers that are wary of putting their fiduciary compliance at risk when adding ESG options to investments, Farrington says.

“The combination of a Democratic chair, with Mayor Walsh at the DOL, and the argument that ESG factors could help improve the investment process, we just think could make it easier for plan sponsors and participants, and we would like to see some action on that construct,” Farrington says.

Employers that use qualified default investment alternatives (QDIAs) will also want to look out for guidance from the new administration, Szapiro says. The final rule does not prohibit ESG funds in a QDIA, stating again that plan fiduciaries must select a fund based only on pecuniary factors. However, the rule does add that a fund is not an appropriate QDIA if it is stated objectives include non-pecuniary factors—for example addressing climate change itself, rather than addressing climate change’s impact on the financial outcomes of investors. Because this portion of the rule does not go into effect until 2022, many retirement plan experts expect there will be additional guidance to ease confusion in the industry.

The difference between the preamble to the DOL’s ESG rule released in July and the final rule in October will also likely be clarified, Farrington adds. While the final rule does not reference ESG, its preamble does, adding a layer of complexity for plan sponsors and leaving many hesitant about ESG investments. In return, employers may choose to completely forego adding ESG funds to their investment lineups out of fear of violating their fiduciary duty.

“To create confusion, or imply that if you invest in a company that has policies that are sustainable to climate, diversity or corporate governance, to suggest that somehow can’t also be an appropriate financial or economic investment, that notion needs to go away,” Farrington argues.

“You can have companies with investment strategies that are viewing the long-term merits of companies that are well-managed and addressing these major issues,” he continues. “These companies can be great investments and contributors to a better world. To assume that you have to be one or the other is a very antiquated notion, and our belief is that this administration is more likely to tackle that than the previous one.”