The ESG rule, the SEC and sustainability

If SEC Chairman Gary Gensler can engage with potential opponents while keeping advocates on the SEC’s side, ESG could score more policy wins next year.

Every December, InvestmentNews looks back at the most important developments of the previous 12 months. From ETFs to ESG to TINA, we’ve got all the acronyms covered — and a whole lot more.

When the Department of Labor last month promulgated a regulation that would facilitate environmental, social and governance principles in retirement investing, some skeptics of the proposed rule liked what they saw in the final version.

The rule reassures fiduciaries they can use ESG factors in selecting investments for a retirement plan but does not compel them to do so. That crucial nuance brought on board potential opponents.

One of the supporters of the final rule was the Investment Company Institute, which represents the mutual fund industry. The ICI praised DOL’s “neutral” approach to ESG.

“ICI welcomes the department’s clarification that while fiduciaries may include consideration of climate change and other ESG effects as part of their risk-return analysis, they must put the financial interests of plan participants first and cannot sacrifice potential returns for these goals,” Elena Barone Chism, ICI deputy general counsel, said in a statement.

The Investment Adviser Association opposed the original ESG proposal. But it supported the final version because the agency removed several provisions, including the prohibition against using ESG funds as a qualified default investment alternative.

“We raised significant concerns about the current rule’s ESG and proxy provisions when they were proposed and urged the DOL to withdraw both proposals,” IAA general counsel Gail Bernstein said in a statement. “We are pleased to see the DOL incorporated many of our comments in the final rule.”

STRONG SUPPORT

The DOL didn’t move the final rule so far toward the critics’ point of view that it lost any of its strong support from ESG advocates.

“The policymakers are catching up to the market,” Bryan McGannon, managing director at U.S. SIF: The Forum for Sustainable and Responsible Investment, said at the InvestmentNews ESG Summit earlier this month.

One of the first actions President Joe Biden took after being inaugurated in 2021 was to launch a government-wide effort to combat climate change. The DOL then scrapped the Trump administration’s DOL ESG rule and started over.

The backing the Biden measure generated shows there may be a path for the Securities and Exchange Commission to follow as it advances its own ESG rules in the face of industry resistance and political opposition from Republican lawmakers who won control of the House in the midterm elections.

The SEC is mulling over thousands of comment letters that have been submitted regarding its proposals to mandate climate risk disclosures by public companies, as well as those to require ESG disclosures by investment advisers and funds and to strengthen fund naming rules.

If SEC Chairman Gary Gensler can engage with potential opponents while keeping advocates on the SEC’s side, ESG could score more policy wins next year.

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