President Joe Biden’s Department of Labor (DOL) published new proposed rules on financial investments and shareholder rights. The new proposals are a result of an Executive Order signed by Biden requiring DOL to make big changes to the law regarding investments and retirement plans. This is being done in the name of what is called “Environmental, Social, and Governance” (ESG) considerations.
The new DOL rules are designed to supposedly make it easier for investors to make decisions that factor in things other than solely their clients’ bottom line, such as ESG; investments that help with a leftist view on climate change and social issues as opposed to what is simply a good investment for the client. Yet, as Rupert Darwall writes in Real Clear Energy, there are some serious problems arising from the proposed changes:
“Ambiguity is at the heart of the proposed rule. On the one hand, it leads plan managers to treat climate and ESG as material to a risk-return analysis, a list that includes the physical and transitional risks of climate change, workforce diversity, and inclusion, and creates a presumption that they should all be treated as pecuniary factors. As the preamble says, ‘the proposal makes clear that climate change and other ESG factors are often material and that in many instances fiduciaries should consider climate change and other ESG factors in the assessment of investment risks and returns.’ On the other, the rule also states that whether any particular factor is material ‘depends on the individual facts and circumstances’ and that it’s the responsibility of fiduciaries to make their own assessment of the weight given to any particular factor. The DOL’s argument that its proposal does not ‘tip the scale’ against ESG-style investment approaches is in danger of tipping the scale against the letter of the law.”
Darwall goes on to explain that these new rules will not just simply allow fiduciaries to consider ESG factors, but that plan managers may be sued if they don’t proactively consider ESG investments.
“For a rule the DOL claims is needed to correct perceptions, the new rule does a fine job in creating the perception that it drives a coach and horses through ERISA’s [the Employment Retirement Income Security Act’s] requirement that plan managers act exclusively in the financial interests of plan participants and beneficiaries. A recent editorial in the Wall Street Journal argues that the rule will ‘coerce’ workers and businesses into supporting progressive policies. ‘Retirement plan sponsors won’t merely be allowed to prioritize climate and social factors in how they invest,’ the Journal editorial board claims. ‘They could be sued if they don’t.’ Should this become the general perception and the DOL fail to correct it, ERISA’s exclusivity requirement becomes a dead letter. The new rule is thus a test case of whether the executive branch can nullify the express intent of Congress enshrined in statute law through regulatory rulemaking.”
Read the full analysis by Rupert Darwall in Real Clear Energy, here.