Bill Seeks to Provide Plan Sponsors with Legal Cover for ESG Investing

A trio of congressional legislators is looking to end regulatory uncertainty and provide legal cover for employers and retirement plan sponsors that consider environmental, social, and governance (ESG) factors in their retirement plan investments.

The Financial Factors in Selecting Retirement Plan Investment Act, introduced by Sens. Tina Smith, D-Minnesota, and Patty Murray, D-Washington, and US Rep. Suzan DelBene, D-Washington, would amend the Employee Retirement Income Security Act (ERISA) to clarify that retirement plans are allowed to consider ESG factors in their investment decisions when they are expected to have an impact on investment outcomes.

The sponsors of the bill say that despite strong demand for sustainable investment options, relatively few workplace retirement plans take sustainable investing principles into account because of the legal uncertainty regarding ever-changing regulations.

Late last year, the Department of Labor (DOL) under then-President Donald Trump issued a final regulation related to ESG investing that requires plans to only use financial considerations in investments. That final rule took a softer stance than the initial proposal, which ESG advocates said would chill sustainable investing by corporate pensions.

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But after President Joe Biden took office, the DOL said it would not enforce the final ESG rule and that it would revisit those guidelines.

State Street Global Advisors, which supports the proposed legislation, said that while the bedrock principles of ERISA have remained constant over the years, the nuances and changes that come with each presidential administration have made including funds that incorporate ESG considerations “problematic and fraught with uncertainty” due to the risk of litigation.

“We believe that addressing material ESG issues is good business practice and essential to a company’s long-term financial performance,” State Street Global CIO Lori Heinel said in a letter of support to Smith. “Legislation, unlike regulatory guidance, will bring certainty and closure to the back and forth of the past few decades.”

The bill would also allow retirement plan fiduciaries to consider collateral ESG or similar factors as “tie-breakers” when competing investments can reasonably be expected to serve the plan’s economic interests equally well. The bill’s sponsors say the tie-breaker rule has been in existence in varying forms in DOL guidance or regulation for decades, until it was largely repealed last year by the Trump administration.

Additionally, the bill would formally repeal last year’s DOL rule on ESG investing and limit future regulatory actions that impose regulatory burdens in an effort to discourage ESG investing by ERISA plans.

“Sustainable investment options are good for retirees and good for our environment,” Smith said in a statement. “We’re putting forth this legislation because we know there’s a growing demand for sustainable investing, and because we believe Congress should act now to provide the legal certainty necessary to make sure workplace retirement plans are able to offer these options to workers across the country.”