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Department of Labor won’t enforce Trump-era ESG rules for fund selection and proxy voting

Move from DOL comes days after the announcement of ESG and climate initiatives by the SEC

The US Department of Labor (DOL) will not enforce Trump-era rules requiring workplace pensions to solely consider financial factors when selecting plan investments or casting proxy votes, it said yesterday.

The rules, which came into force just days before President Biden took office, have been roundly criticised for potentially restricting the ability of workplace retirement plans to offer sustainable investments and exercise shareholder rights on ESG issues. While the final text of the rules removed earlier mentions of ESG – focusing instead on limiting the consideration of ‘non-pecuniary’ factors or factors which are judged as having no impact on an investment returns – US regulators such as the Securities and Exchange Commission (SEC) and the DOL were publicly critical of ESG over the four years of the Trump administration.

The latest DOL statement confirms expectations that President Biden will suspend the two rules as part of a stated commitment to review all Trump policies “that were harmful to public health, damaging to the environment, unsupported by the best available science or otherwise not in the national interest”. So far, roughly 100 environmental policies have been earmarked for review.

According to the DOL, stakeholders have described “a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules may in fact allow”. In addition, the DOL said that concerns had been raised over the rushed rule-making process and a failure to consider substantial evidence defending the use of ESG to improve investment returns.

The decision was based on feedback from asset managers, labour organisations, plan sponsors, consumer groups, service providers, investment advisors and other stakeholders, the agency said.

While the rules have not been formally rescinded, the DOL said that they will not be enforced until the publication of further guidance on the topics.

“We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations,” said the DOL’s Principal Deputy Assistant Secretary for the Employee Benefits Security Administration Ali Khawar.

The move by the DOL will be widely seen as a pivot toward a more constructive position on ESG under the Biden administration. It comes less than a week after the SEC announced the creation of a task force on “ESG-related misconduct” and an enhanced focus on climate-related risks in regulatory examinations of corporate filings.