DoL proposes fresh ESG regulation

The proposal is expected to reconfigure restrictions on climate-based investing incurred by pension fund investors

August 20, 2021

The US Department of Labor (DoL) has proposed changes to a controversial rule brought in last year that would have restricted pension funds' ability to implement ESG strategies.

The proposal, sent to the White House’s Office of Management and Budget, is expected to lay out amendments to the 'Financial Factors in Selecting Plan Investments' rule brought in towards the end of the Trump administration.

The DoL's new proposal, 'Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights', is also expected to contain a reworking of Trump administration rules that limited pension funds' ability to engage with proxy voting advisers.

Last year, the DoL tried to enforce a rule that would have restricted funds from making ESG investments unless financial returns or risk mitigation was being clearly prioritised. It drew criticism from the US Impact Investing Alliance, Democratic lawmakers, and international investors.

Experts indicated that it would lead pension fund investors would avoid ESG funds altogether because of the potential legal ramifications they might incur.

Following a period of strong lobbying against the plan, and as President Joe Biden took office, the rule was shelved. The new proposal is set to mark a significant departure from the 2020 rules.

The DoL is also expected to announce changes to proxy voting legislation, implemented last year, that placed certain parameters around shareholder activism.

The final rule of the legislation stated that shareholder activism exercised by private employee benefit plan fiduciaries must be made “solely in the interest of providing plan benefits to participants and beneficiaries considering the impact of any costs involved”.

The rule also placed financial objectives above non-pecuniary ones, by stating that plan fiduciaries should not subordinate a beneficiary's retirement income, for example, in favour of non-pecuniary goals.