Blog: ESG Regulation Moves Forward – National Association of Plan Advisors

Looks like the Office of Management and Budget (OMB) has wrapped up its review of a new rule on Environmental Social & Governance investing in retirement plans.

The regulation, submitted for review on Oct. 6 to the White House’s Office of Management and Budget as “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” in a “final rule stage” was accompanied by an abstract that reads, “This rulemaking implements Executive Order 13990 of January 20, 2021, titled Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis, and Executive Order 14030 of May 20, 2021, titled Climate-Related Financial Risks.” Still listed on the OMB’s review dashboard on Friday, it was removed over the weekend, suggesting the review has been completed—leaving it to the Labor Department to proceed with issuing the regulation—perhaps as soon as this holiday-shortened week.

A Little History

In August 2021, the Labor Department submitted to OMB a proposal for review, before releasing a proposed rule that took a completely different tact than that issued by the Labor Department in the waning days of the Trump Administration (which the Biden Administration announced right out of the gates that it would not enforce).

Rather than cautioning against the use of such factors in considering investments (or proxy decisions, that version called for allowing workplace retirement plan managers to consider environmental, social, and corporate governance factors when making decisions about plan investments, with a decided emphasis on the environmental aspects. At the time the Labor Department said it was concerned “uncertainty with respect to the current regulation may deter fiduciaries from taking steps that other marketplace investors would take in enhancing investment value and performance, or improving investment portfolio resilience against the potential financial risks and impacts often associated with climate change and other ESG factors.” 

The ARA submitted comments on that version last December. 

In the meantime, DOL had requested information on whether the department should take action to protect retirement savings from risks associated with climate changes, on which the ARA also weighed in, contending that the DOL should not call out climate-related risks for special attention.

Nomination Nexus?

As for what set all this in motion, on Nov. 13, 2020, the DOL under the Trump Administration published a final rule on Financial Factors in Selecting Plan Investments, which adopted amendments to the “Investment Duties” regulation under Title I of ERISA. The changes stepped away from using the terms environmental, social and governance (ESG) factors, but instead generally require plan fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary factors.” 

Then, on Dec. 16, 2020, the DOL published a final rule on Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, which also adopted amendments to the Investment Duties regulation to address obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.

The regulatory agenda still shows a December 2022 target date for release of a final rule—and with the delivery to OMB—and now the apparent conclusion of that review…

Stay tuned.

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