Compliance November 22, 2022

DOL Finalizes Rule Opening Door to ESG Investing in Retirement Plans

The DOL announced a final rule that retirement plan fiduciaries can consider climate change and other ESG factors when selecting investments.

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The U.S. Department of Labor on Tuesday announced a final rule that retirement plan fiduciaries can consider climate change and other environment, social and governance factors when they select investments for retirement plans like 401(k)s, overturning a rule passed under former President Donald Trump that plan fiduciaries only consider “pecuniary” factors.

The news finalizes a discussion started more than a year ago to allow workplace retirement plan providers and their advisers to consider ESG factors when designing plan investments. The initial DOL proposal, made in October 2021, caused a stir in the industry in its reaction to the Trump-era DOL, which had warned against the integration of climate change and ESG factors with the rationale that it would not meet a fiduciary’s obligation to make the best investment decision for participants.

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The rule follows an Executive Order from President Joe Biden, to “protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.”

The final rule, which now explicitly allows for ESG investing, “can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers,” the DOL said.

The ruling also allows fiduciaries to consider climate change and ESG factors when selecting a Qualified Default Investment Alternative and exercising shareholder rights, such as proxy voting.

“The rule announced today will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments,” Assistant Secretary of the Employee Benefits Security Administration Lisa M. Gomez said in a statement.

The “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule comes at the direction of an executive order signed by Biden on May 20, 2021. It will be effective 60 days after its publication, the DOL said.

The Markets November 22, 2022

Alternative Asset Managers Release Tool for ESG Disclosure

The ESG Integrated Disclosure Project is intended to provide a standard format for ESG-related disclosures and to offer companies a baseline from which to develop their ESG reporting capacity.

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In a move to improve transparency and consistency regarding environment, social and governance disclosures for private companies and credit investors, a group of alternative asset managers have launched a template for ESG disclosure. [Source]

The ESG Integrated Disclosure Project template is intended to provide a standard format for ESG-related disclosures and to offer companies a baseline from which to develop their ESG reporting capacity. The project is led by the Alternative Credit Council–the private credit affiliate of the Alternative Investment Management Association–the Loan Syndications and Trading Association and the United Nations-supported Principles for Responsible Investment.

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“By simplifying and harmonizing existing market practices, this new industry-led initiative will reduce the burden on borrowers while improving the materiality and comparability of ESG disclosure for investors,” Jiří Król, global head of the Alternative Credit Council, said in a statement.

The group behind the template says it was designed to be completed by borrower companies and shared with their lenders. Companies can access the template themselves or share it with their lenders or the arranger in a syndicated loan. The group also said the executive committee spearheading the project will review the template and make any necessary updates on an annual basis.

The Alternative Credit Council represents 250 asset management firms that manage over $600 billion of private credit assets. The LSTA is a not-for-profit trade association that includes commercial banks, investment banks, broker-dealers, hedge funds, mutual funds, insurance companies, fund managers and other institutional lenders.

The template’s launch comes as business, associations and financial regulators increasingly seek out ways to standardize ESG and climate-related disclosure data. Earlier this year, the Securities and Exchange Commission said ESG-related issues would be a major focus of the regulator this year. In particular, it wants to know if investment advisers and registered funds are accurately disclosing ESG investing approaches and if they have controls in place to prevent securities laws violations regarding the disclosures.

The SEC also proposed in March rule changes that would require publicly traded companies to disclose climate-related risks that are “reasonably likely to have a material impact” on their businesses, earnings results, or financial condition. The climate-related risk information would also include disclosure of greenhouse gas emissions, as well as certain climate-related financial metrics in an audited financial statement.

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