The clock is ticking for the Biden administration to nullify Donald Trump’s restrictions on retirement plan fiduciaries, rules by which the Republican sought to limit their ability to direct money into environmental, social and governance funds. Trump’s Department of Labor moved earlier this month to adjust the Employee Retirement Income Security Act of 1974 (ERISA) to require those overseeing pension and 401(k) plans to always put economic interests ahead of so-called non-pecuniary goals. It was seen as a direct attack on ESG and green investing (though they have become more profitable of late).
In response, several financial advisory firms have since taken steps to reduce the number of ESG-focused funds they deem appropriate for retirement investors. “The rule is already having a harmful effect,” said Jon Hale, head of sustainability research at Chicago-based Morningstar Inc. “Retirement fiduciaries and consultants are removing ESG funds from plans and from being considered for plans, at a time when these funds are more numerous than ever before, have outperformed traditional funds in recent years, and have attracted more flows from investors.”
Reversing the rule would be consistent with President Joe Biden’s stated objectives. Biden included the DOL’s “Financial Factors in Selecting Plan Investments” on his list of Trump climate-related agency actions that are up for review.
Biden has signed a slew of executive orders on environmental issues since he took office last week. These included a recommitment to the Paris climate agreement and a request that federal agencies review any and all Trump policies “that were harmful to public health, damaging to the environment, unsupported by the best available science or otherwise not in the national interest.”
The so-called ESG rule certainly falls into this category, Hale said. First, the Trump administration didn’t “listen to the science” in making its decision. They moved forward despite receiving overwhelming evidence about the efficacy of using ESG concerns to improve long-term risk-adjusted returns of investments in worker retirement plans. In particular, the Trump rule ignored all evidence that climate risk is financially material across a range of investments, he said.