DOL nominee Walsh raises concerns about Trump rule curbing ESG retirement investing

Marty Walsh, President Joe Biden’s nominee to head the Department of Labor, has promised lawmakers the agency will prioritize a review of Trump administration regulations that he says could crimp the use of environmental, social and governance factors in retirement plan investing — a result that is already occurring, one expert said.

Walsh, who is currently the mayor of Boston, expressed his concerns about two rules approved late in the Trump administration in a written response to questions from members of the Senate Health Education Labor and Pensions Committee.

One regulation would amend federal retirement law to require plan fiduciaries to select investments and strategies based solely on how they would affect the plan’s financial performance, or so-called pecuniary goals. The other measure would limit retirement plans’ proxy voting to matters that affect their financial performance.

“I will instruct [the Employee Benefits Security Administration] to prioritize a reexamination of these issues,” Walsh wrote in response to a question from Senate HELP Chair Patty Murray, D-Wash. “I am especially concerned that the recent rules could make it harder for plans to make investment decisions based on ESG factors, even when those factors are related to the economic wellbeing of plans and their participants.”

Walsh, a former labor organizer, responded in writing to dozens of questions submitted by members of the committee following his Feb. 4 confirmation hearing. The panel approved Walsh in a bipartisan vote on Feb. 11. The nomination has not yet come to the Senate floor.

Walsh’s statement coincides with an executive order Biden issued on his first day in office instructing agencies to review rules approved during the Trump administration that could harm public health or the environment. The investment selection rule was on the list.

The Biden administration should move quickly to issue guidance that it considers ESG criteria to be pecuniary under the Trump rule, said Bryan McGannon, director of policy and programs at U.S. SIF, The Forum for Sustainable and Responsible Investment.

The DOL also should issue a statement that it will not enforce restrictions on funds that use ESG factors from being a qualified default investment alternative, McGannon said. The QDIA limitations have resulted in ESG products being taken off retirement investment platforms since the ESG rule went into effect on Jan. 12, he added.

Those two moves “would be a strong signal to the marketplace that ESG plans can move forward,” McGannon said. “Those who have de-platformed ESG offerings will continue to do so until DOL issues new guidance.”

Although the investment selection rule was modified to remove specific ESG language, it continues to generate concern from the financial industry as well as ESG and investor advocates.

“We continue to have some concerns about that rule — not just in the context of ESG but also as it relates generally to the obligations of plan sponsors when selecting investments to include in their plans,” said Jason Berkowitz, chief legal and regulatory affairs officer at the Insured Retirement Institute.

On a recent InvestmentNews webcast, Securities Industry and Financial Markets Association Chief Executive Ken Bentsen Jr. said the investment selection rule needs to be revised.

“We are not convinced that the rule was sufficiently corrected between the proposal and the final aspect,” Bentsen said. “We think it’s appropriate for the DOL to take a hard look at it.”

That approach was endorsed by Barbara Roper, director of investor protection at the Consumer Federation of America.

“The final [rule] is considerably better than the proposal,” she said during the IN webcast. “But I this this is one that’s still going to need additional work.”