New Rule Supports Corporate Responsibility, but Anti-ESG Fever is Still Rising

Investors who support the environmental, social and governance (ESG) business model got some good news last week when the U.S. Department of Labor (DOL) issued a new rule that loosens restrictions on ESG investing. The federal-level support is a welcome contrast to state-based efforts aimed at thwarting climate action and obstructing corporate social responsibility goals.

Out with the old ESG rules…

The restrictions were imposed during the Donald Trump administration. The DOL announced the new rule in a press release last week. 

“After extensive consultations and feedback from a wide range of stakeholders, the department concluded that two rules issued in 2020 during the prior administration unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially,” the agency explained.

The two rules in question were issued on November 13 and December 16 of 2020, after former President Trump lost his bid for re-election. 

The 2020 rules limited the ability of firms to offer investment products based on “goals and purported benefits” unless they are related to financial performance.

That may seem to make common sense, but the straight-line connection to financial factors is out of step with the holistic approach that underpins ESG investing and the corporate social responsibility movement.

…back to the older ESG rules

The 2020 rules were also out of step with precedents established under the 1974 Employee Retirement Income Security Act (ERISA), which regulates private pension plans. The 2020 rules satisfied policymakers and their allies within the Trump administration, but other stakeholders objected strenuously to the restrictions.

The opponents included “asset managers, labor organizations, corporate America, consumer groups, service providers, workers and investment advisers,” as noted by the DOL.

“These stakeholders questioned whether the 2020 rules properly reflected the scope of fiduciaries' duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries,” the DOL observed. The agency agreed with the stakeholders, who argued that the 2020 rules were inconsistent with DOL guidance going back to the 1980s.

“In its interpretive guidance during this [40-year] period, the Department has consistently recognized that ERISA does not prohibit fiduciaries from making investment decisions that reflect ESG considerations, depending on the circumstances,” the agency explained.

The new rule represents a return to precedents established under ERISA. Published in the Federal Register under the title, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” the new rule will take effect 60 days after publication.

“The final rule retains the core principle that the duties of prudence and loyalty require ERISA plan fiduciaries to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries (such as by sacrificing investment returns or taking on additional investment risk) to objectives unrelated to the provision of benefits under the plan,” the DOL explained.

Regarding climate change, the new rule clarifies that fiduciaries are permitted to take into account “the economic effects of climate change and other environmental, social, or governance factors,” as part of a risk and return analysis (page 22).

…and, in with science

The DOL also took note of charges that the 2020 rule-making process was rushed, and that it “failed to adequately consider and address evidence submitted by public commenters on how ESG considerations can improve investment value and long-term investment returns for retirement investors.”

The rush to implement poorly informed policies and the failure to consider facts and evidence have become a hallmark of the Republican party’s governance. The 2020 rules were not the only example of fact-free policy making during the Trump administration, but they were a particularly egregious example. Even as leading businesses began to embrace evidence-based decarbonization strategies like the Science-Based Targets initiative, the former president and his administration continued to foster misdirection on climate policy.

The new rule is a more accurate reflection of profit-making based on observable facts and professional expertise.

“Climate change and other environmental, social and governance factors can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers,” explained Lisa M. Gomez, the Assistant Secretary for Employee Benefits Security.

“The rule announced today will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments,” Gomez added.

Next steps for ESG investing

By spelling out the permissibility of climate change and other ESG factors, the new rule should help relieve some of the pressure on financial institutions being imposed by state-based policymakers who are pursuing a vendetta against “woke” businesses.

Still, the anti-ESG movement among Republican office holders and candidates shows no sign of slowing down. To date, at least 17 states have imposed or are considering laws that limit the ability of businesses to consider ESG factors.

The business community can help push back against the anti-ESG movement by withdrawing financial support from Republican candidates for office that express anti-ESG views. However, they also need to dig deeper and stop supporting organizations that are administered partly or fully by partisan Republican office holders.

The nonprofit organization State Financial Officers Foundation is one example. Earlier this month, David Armiak of the Center for Media and Democracy reported that “every single financial officer on the ‘team’ is Republican, mostly serving in elected positions,” even though the organization claims that it is “not involved in issue advocacy on behalf of elected officials.”

That description is supported by other news outlets. For example, in an article dated September 16, 2022, reporters Gina Gambetta and Dominic Webb of Responsible Investor noted that members of the group include financial officials in Texas, West Virginia, Arizona and Kentucky.

“All four have been outspoken in their criticisms of ESG,” they observed, adding that the Foundation “has taken a strong stance against ESG on social media and appears to be supporting the pushback against it.”

The Foundation itself makes no secret of its anti-ESG stance. As of this writing, its website features a tweet purported to be from an account run by The Washington Stand, a publication of the ultra-conservative Family Research Council. The tweet links to an article titled, “Anti-Woke State Treasurers Ride Their Own Red Wave.” 

“Starting in 2024, Republicans will control double the number of state treasuries as Democrats,” the tweet begins, adding: “And at  @SFOF_ conference last week, conservative leaders made it clear that moving forward, they plan to be woke capital’s worst nightmare.”

Until recently, the Foundation's website listed sponsors and “friends of sponsors,” including Fidelity Investments, Wells Fargo and JPMorgan Chase, among others. As Gambetta and Webb reported, at least two other companies have cut ties. Those remaining need to exercise their pro-ESG muscles and follow suit.

Image credit: Adam Śmigielski via Unsplash