As US Awaits Biden Veto to Keep ESG Rule, Advisers Shrug

Much ink has been spilled over legislation to overturn a DOL rule that allows ESG investing in retirement plans. Plan advisers say that no matter what happens, they will stick to current operations.


It’s the environmental, social and governance retirement investing rule that is shaking the political world. Legal teams are
filing lawsuits. Editorial boards are opining. TikTok videos are being posted.

In the meantime, many of the practitioners at whom the Department of Labor’s rule that allows ESG in retirement plans is largely directed—that is, plan fiduciaries—say the outcome won’t change their daily workflow.

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“As far as what’s happening in Congress, I would say, candidly, that it’s a political football,” says Steven Kaczynski, a senior financial adviser and managing director of fiduciary plan solutions with Pittsburgh-based DBR & Co. “If you are following a prudent process for monitoring investments, the process is the important thing. What informs you is risk and return and risk-adjusted performance.”

Last week, the U.S. Senate followed the House of Representatives in approving a resolution that overturns a DOL rule paving the way for the consideration, but not the requirement, of ESG factors in retirement plan investing. The resolution now sits with President Joe Biden, who has been clear that he will use his administration’s first veto on the act to keep the rule in place.

Retirement plan fiduciary Kaczynski says his firm includes an update on the DOL’s rule in every client update. It generally goes toward the same end: If a plan sponsor wants ESG-focused funds, his firm can advise on prudent options that meet the investment policy statement criteria. If the plan is not interested, ESG factors will not be considered.

“It’s something that we would refer to as a rather friendly rule for fiduciaries,” he says.

Jim Sampson, the national practice leader at Hilb Group Retirement Services, says ESG does not come up much with his clients, who are generally plan sponsors with $10M in assets or smaller. It isn’t that Sampson doesn’t follow the ESG debate or take a stance. It’s just that, in practice, whether the DOL rule stays, goes or even flips back to the President Donald Trump-era guidance that plan fiduciaries should focus on “pecuniary” factors only, it won’t change his Boston-based firm’s fiduciary approach.

We take the mindset that we’re trying to have people invest in funds that make money,” Sampson says. “If they happen to have a good intention along the way, that’s great. I just don’t have a dog in the fight.” 

For Whom the Pendulum Swings

Kevin Takinen, a 401(k) and financial wellbeing manager at Sequoia, says his firm gives regular updates to clients on the ESG rule and advises on which way regulation is moving.

“It is a conversation that comes up regularly with our clients,” Takinen says. “They want to know, ‘where is this pendulum going to land?’ It swings one way, then the other with various presidential administrations. Clients want to be ready to take action, but action that is aligned with regulation.”

Takinen says the lack of regulatory clarity over the past six years or so is why it’s so important to have an adviser guiding a plan’s ESG investing decisions. Even if that advice, to date, has remained about the same.

“Because of the constant fluctuations, they [plan fiduciaries] have held steady,” he says. “If we are going to add in a fund that has an ESG mandate, let’s make sure it meets everything else that might be one of the factors in the plan’s investment policy statement; it’s got to meet everything else in the IPS so that remains tried and true in all situations.”

The back-and-forth has made some clients more conservative in their approach to ESG funds, says Takinen, who works out of Phoenix for the San Francisco-based Sequoia, which has over $9.1 billion in assets under advisement for over 550 clients.

“A lot of times you talk with clients, they prefer to take the more conservative approach because they don’t want to run afoul of litigation or regulation,” he says. “That pendulum is there; they want to make sure they are in line with the ruling.”

Hold the ESG

Kaczynski of DBR & Co. notes that flip-flopping, while not a concern for plan sponsors, may be having a chilling effect on ESG factor’s influence, at least for individual participants.

“We are now seeing the occasional participant or private client saying something like, ‘Do I have any ESG investment? No, I don’t? Good. I wanted to make sure I wasn’t involved in that—I don’t want that in my retirement plan.’”

When it comes to larger plan sponsors, Kaczynski said the results of the current political scuffle likely will not result in any action one way or the other, barring a drastic rule change mandating or otherwise calling off ESG investing.

“In the short term, I don’t think our clients will worry about it,” he says. “The vast majority of the time, ESG is not on the forefront of our clients’ minds, nor is it something that they are formalizing as a criteria when they monitor investments.”

Gensler Says SEC Agnostic On Green Investing, Seeks Improved Disclosure

The SEC chair told a room of institutional investors that the regulator is “merit neutral” on how investors use climate-related information.

Gary Gensler

If a proposed Securities and Exchange Commission rule on climate-related disclosures passes, the regulator will be focused solely on ensuring “consistency and comparability” so that investors can make informed decisions, Chairman Gary Gensler said while speaking at a conference of institutional investors on Monday.

Gensler made the comments while addressing the SEC’s proposed rule from March 2022 that would require public companies to disclose information about their “climate-related risks that are reasonably likely to have a material impact on their business.” Under the rule, issuers would also be required to disclose Scope 1 and 2 greenhouse gas emissions (their direct emissions and indirect emissions from electricity, respectively); and Scope 3 emissions (those from their supply chain, if it is material or if the issuer has a GHG goal).

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Many issuers are already disclosing their GHG emissions, and more investors are demanding this information or at least considering it in their investment strategy, Gensler said at a conference hosted by the Council of Institutional Investors. This information is already in capital markets as a result of market demand, according to the chairman, and the SEC’s role is more about ensuring valid reporting for investors than about influencing strategy.

Amy Borrus, CII’s executive director, noted in leading the discussion with Gensler that the climate disclosure rule is likely to be challenged in court. Gensler responded that the SEC has not yet finalized the rule and is carefully considering approximately 15,000 comments that have been submitted, which he said is a record number for the SEC.

The SEC is “merit neutral” when it comes to how investors should incorporate GHG emissions into their investment strategy, Gensler told the audience. If someone wants to go “long on green” or “short on green,” that is not the SEC’s business, he said. Instead, the regulator is looking to standardize these disclosures for the benefit of investors that consider this information material.

Borrus asked Gensler specifically about Scope 3 climate disclosure, the most controversial of the three, which would require some registrants to report GHG in their value chain. Gensler responded that he did not want to get ahead of the rulemaking process and, even though disclosures of all three scopes are becoming more common, Gensler conceded that this area is “not as well developed.” He said the SEC’s “tiered approach” to GHG disclosure, requires Scope 1 and 2 disclosure by all registrants, but exempts smaller companies and those issuers who do not have an emissions goal or target from Scope 3 disclosures.

During the conversation, Gensler asked for comments on a proposed rule on minimum pricing increments, which would change pricing increments for National Market System stocks from a full cent to sub-penny increments. He said he especially wanted more comments on how to create a more level “playing field” between “lit and dark markets.”

Borrus asked Gensler why the SEC has preferred to take enforcement actions against cryptocurrency issuers instead of issuing new rules. Gensler responded that securities laws already apply to crypto, and an important goal for the SEC going forward will be “to bring this field into compliance.”

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