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The US gets up to speed with ESG

The status of the so-called “Pecuniary Rule” will be central as country adopts ESG

It has taken a long time – too long perhaps for some – but the US is finally getting up to speed with all things environmental, social and governance (ESG). In fact it could be argued that developments in play at the moment could put the country at the forefront of ESG globally.

All of a sudden, it seems, a wave of activity has started to break, involving the top tier of regulators and policy making that includes the Securities and Exchange Commission, the Commodities Futures Trading Commission (CFTC), the Department of Labor and even the Federal Reserve.

It’s not well known that the US was the first country in the world to issue guidance on corporate climate risk disclosure, way back in 2010. So the roots of what we are seeing now go back a long way.

The overarching context for the current activity is President Joe Biden’s sweeping plans to strengthen the country’s financial system against climate risk.

An Executive Order in May required the country’s financial regulators and public bodies to mobilise on climate risk and investment before the end of the year.

It was a “monumental shift” says Fiona Reynolds, CEO of the United Nations-backed Principles for Responsible Investment (PRI).

President Biden also tasked Treasury Secretary Janet Yellen – in her capacity as Chair of the Financial Stability Oversight Council (FSOC) – to report on measures needed to “enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk to the financial system or assets”.

He gave the FSOC 180 days to complete the task, meaning it will have to present the outcome by mid-November, shortly after the United Nations’ global climate summit, known as COP26, in Glasgow, Scotland in November.

It was an earlier UN climate summit, COP 21 in the jargon, held in Paris in 2015 which led to the Paris Agreement. One of Biden’s first acts as President was to re-enter the US into the accord.

In his Executive Order, Biden described “consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk” as the “policy of my Administration”.

An even wider context for current events is the “winds of change” being faced by the likes of ExxonMobil in this year’s proxy voting season.

But so much for the big picture. Investors will be looking to the specifics that affect them, particularly in regard to the Department of Labor’s so-called “Pecuniary Rule”, which has proved something of a battleground for ESG.

The “Financial Factors in Selecting Plan Investments” (aka the “Pecuniary Rule”) had drawn criticism from ESG advocates for potentially restricting the ability of workplace retirement plans to offer sustainable investments.

Incidentally, a very good starting point on this crucial topic is a recent Natixis Investment Managers article by former DOL official Bradford Campbell. Campbell is currently a partner for Faegre Drinker in Washington, D.C. and a former Assistant Secretary for Employee Benefits Security at the DOL. Check out his views on the topic.

But things have moved rapidly since the revised rules came into force in January. President Biden has now instructed the DOL to consider revising the rules, which came in under the previous Administration.

Meanwhile, Democratic Senators Tina Smith and Patty Murray and Representative Suzan DelBenes are even seeking to repeal the rules.

While Natixis Investment Managers views this as a step in the right direction, we believe subsequent rulings should provide a regulatory framework that recognizes the important role ESG integration can play in providing retirement plan options for plan participants. 

We recently urged the DOL to consider five critical points to make it clear that prudently-selected Environmental, Social, and Governance (ESG) investments are appropriate for ERISA plans. Read more here. 

“These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights,” said Principal Deputy Assistant Secretary for the Employee Benefits Security Administration Ali Khawar.

The Department will now “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.”

So it’s an unusually fast-moving situation and plan fiduciaries will be well advised to keep tabs on developments – and take part in the DOL outreach to help shape regulation going forwards. According to Natixis Investment Managers 2021 ESG Investor Insights Report, 71% of investors want to make a positive impact with their investments. Their ESG investing solutions can help in navigating these uncharted waters.  

by Jim Roach, Senior Vice President, Retirement Strategies

Email: Jim.Roach@Natixis.com

The views presented are those of Natixis Investment Managers as of the date of publication and subject to change based on market or other events. Investing, including ESG investing, is subject to risk, including the risk of loss.