This week, a new Department of Labor rule took effect reversing a rule by the previous DOL that deterred pension fund fiduciaries from considering ESG factors in directing their funds’ investments. The new rule eliminates the previous Department’s requirement that investments be directed solely on the basis of “pecuniary” factors, but does not require consideration of ESG factors. A lawsuit seeking to enjoin the rule was filed in federal court last week by 25 state attorneys general and aligned parties.
Controversy: Even though the rule does not mandate that fiduciaries consider ESG factors, it has still drawn fire from Republicans at both the federal and state level. The focus has been the environmental component of ESG, which the lawsuit contends would allow pension plans to “pursue an agenda that discriminates against the oil and natural gas sector based on nonpecuniary factors and politicized ESG criteria.” Thus far, DE&I efforts by companies, another critical component of ESG, have received less attention in the attacks.
The long-running debate over “social investing”: Beginning with the rise in “social investing” by union plans in the 1990s, there has been a continuing debate over whether ERISA’s fiduciary duties prevent plan administrators from considering factors not directly related to companies’ financial performance when determining retirement plan investments. The union plans’ strategy directed investments into companies based on track records regarding employee and community relations. The debate has been revived with the adoption by large companies of ESG practices and policies promoted and applauded by asset managers, such as BlackRock. ESG efforts now go well beyond the issues labor was pressing for and include climate change, DE&I and other factors. ESG proponents argue that influences like climate change and diversity impact the long-term economic health and prosperity of the company and that such factors are likewise relevant to investment decisions.
Congressional attention: Last year, House Education and Labor Committee Republicans criticized the new rule as denying retirees protection against “investment managers seeking to advance social and political objectives unrelated to the financial benefits to workers and retirees.” The new rule will likely be one of the policy focal points of a congressional broadside against ESG generally. If nothing else, it will bring to the forefront the issue of whether factors such as climate change and DE&I have a material impact on the financial well-being of companies. Many if not most larger companies strongly believe that they do.