Democrats press Labor Department for update on ESG rules

A group of House Democrats on Thursday sought assurance from the Department of Labor that it will reverse Trump-era rules that have discouraged the use of ESG factors in retirement plans.

In a letter to Labor Secretary Marty Walsh, Reps. Andy Levin, D-Mich., Cindy Axne, D-Iowa, Jesús García, D-Ill., and others asked for an update on the DOL’s rule proposals on environmental, social and governance criteria. Those items were included in the Employee Benefits Security Administration’s regulatory agenda in the spring, although it has not yet issued a proposal.

“We urge DOL to issue such a rule and ask that you inform us of DOL’s plans to do so, including the process and timetable the department will follow. We hope to work with you to ensure that this new rule is strong, clear and enduring,” the letter stated.

Some of the same members of Congress have introduced legislation that would encourage the use of ESG criteria. That includes a bill reintroduced in May by Levin that would amend the Investment Advisers Act to require “large asset investment advisers” to consider ESG factors such as corporate political spending, worker and collective bargaining rights, environmental risks, human rights, diversity and inclusion practices and proxy voting practices.

Levin also again introduced a bill that would amend the Employee Retirement Income Security Act to let retirement plan sponsors use sustainability criteria in their investment policy statements.

Last year, the Trump-administration DOL finalized two rules that tamped down on use of so-called nonpecuniary factors in investment selection and proxy voting, which were widely seen as limiting the use of ESG. Under the Biden administration, the DOL indicated it would not enforce those rules and would seek to revise or reverse them. That came in part from an executive order from the president to address financial risks tied to climate change.

“We objected to the previous administration’s promulgation of the ‘Financial Factors in Selecting Plan Investments’ (the ‘ESG rule’) regulation in November 2020, and thank the department for its decision not to enforce it,” the letter from Democrats stated.

“We also agree with stakeholders who argued that the ‘ESG rule’ was rushed and failed to consider the ample evidence highlighting the long-term value of ESG investing for workers’ retirement security,” they said. “While ending that rule’s enforcement is a necessary first step, we feel it is just that — a first step. A new rule is essential to eliminate the aforementioned chilling effect and allow plan fiduciaries to incorporate ESG factors into their investment strategies without fear of legal consequences.”

The members of Congress cited enormous growth in ESG investing, with more than $51 billion going into sustainable funds last year, roughly double the amount in 2019, according to data from Morningstar.

Proponents of ESG investing have long held the position that those criteria are financially material, with such investments having a performance edge, and should therefore be part of fiduciary considerations.

This week, the White House nominated an experienced ERISA lawyer to lead the Employee Benefits Security Administration, Lisa Gomez, a move that observers said would benefit the agency with its busy regulatory agenda.