President Biden signed an executive order on May 20 on climate-related financial risk that seeks to change the rules regarding the use of environmental, social, and governance (ESG) investments in retirement plans. The order specifically directs the Employee Benefits Security Administration (EBSA) bureau of the Department of Labor (DOL) to consider suspending, revising, or rescinding the Trump-era “Financial Factors in Selective Plan Investments” rule regarding ESG retirement investments. The executive order is consistent with the expectation that the Biden administration will move to encourage the consideration of ESG factors when selecting retirement plan investments given the emphasis on climate change initiatives.
In the waning days of the Trump administration, the EBSA published guidance directing retirement plan sponsors to only consider economic-related or pecuniary factors in evaluating potential investments. Although the rules did not prohibit the consideration of ESG funds in the selection of retirement plan investments, the rules created a perception that ESG investments could be subject to increased fiduciary scrutiny due to the emphasis on performance-based factors.
The Biden administration has been clear that it considers climate change to pose a financial risk to the United States, and has moved to reverse or stop Trump-era policy that it views as a hindrance to the advancement of its position on the environment. In fact, EBSA has already taken steps to try to effectively nullify the Trump ESG rule by its announcement in March 2021 that it would not enforce the rule. President Biden’s executive order is an anticipated extension of the March 2021 announcement, and it is now expected that the rule will be substantially changed or rescinded. In the meantime, Plan fiduciaries will need to continue to consider whether ESG factors are prudent when making investment offerings available under retirement plans.