Julie K. Stapel, a Chicago-based partner at Morgan, Lewis & Bockius LLP, said there are some plan fiduciaries who have been waiting for the greenlight from the Labor Department on this issue for years, but the regulatory “pingpong” may give other fiduciaries pause. If a plan fiduciary is still uncertain about incorporating ESG factors into plan investment decision-making and plan lineups, “I do think the possibility of a reversal in as little as three-and-a-half years could continue to give them pause,” Ms. Stapel said, referring to the 2024 president election.
But the most recent Labor Department proposal has a greater chance of surviving long term because it was proposed and could be finalized in the early days of the Biden administration, said Joshua A. Lichtenstein, an ERISA and benefits partner in New York who heads Ropes & Gray LLP’s ERISA fiduciary practice. “Even if there is a change in administration in 2024, the rule will have presumably been final and effective for a long enough period of time that people will be pretty heavily invested and reliant on it, and if that’s the case, then I think it becomes harder to pull back the rule,” he said.
ESG investing has become more mainstream in recent years, said John Hoeppner, Chicago-based head of U.S. stewardship and sustainable investing at Legal & General Investment Management America Inc. “There’s been a maturing of the whole industry while this kind of tennis back-and-forth has been happening,” he said. “I don’t think the debate will ever calm down, but perhaps the baseline is shifting.”
Added Mr. Lichtenstein: “I think that the investment world is just moving more and more toward ESG, and so when you get to 2024, I think that if a new administration did really want to carve this back, they might face the very real commercial issue (that) it might become really limiting for ERISA plans to go back to not investing in ESG at all,” he said.
It’s unusual for a new administration to change a final regulation the way the Biden administration is proposing to change the Trump administration’s rules on this issue, Mr. Lichtenstein noted. But the Trump administration’s rules were also unusual in how quickly they were finalized — with shorter than usual comment periods — and how soon they took effect before the Biden administration took office.
However, the most recent proposal “could reflect a new norm at DOL where there will be less of an idea of deference to prior final regulations,” Mr. Lichtenstein said.
The proposal is premised on the issue of financial materiality rather than the political leanings of different administrations, said Ali Khawar, acting head of the Labor Department’s Employee Benefits Security Administration, at Pensions & Investments‘ Defined Contribution West conference in San Diego on Oct. 26.
“We try to make it clear that increasingly the market recognizes that ESG can be a material financial factor, and when it does, it’s appropriate for the fiduciaries to take it into account,” he said.
However, the Labor Department also “makes it clear that ESG isn’t by definition material, and it isn’t by definition something that you’re required to always make sure that you’re taking into account,” he added.
“The thrust of our proposal is that the fiduciary is the person that’s in the driver seat, and they are the ones that should be making that decision about whether or not it is material.”
Source: https://www.pionline.com/washington/new-dol-proposal-esg-investing-could-be-here-stay-experts-say
