The ongoing battle over the use of environmental, social and governance (ESG) factors when making investment decisions for retirement plans continues.
The latest salvo comes from Reps. Andy Barr (R-KY) and Rick Allen (R-GA), who on June 21 reintroduced their Ensuring Sound Guidance (ESG) Act (H.R.4237) with some changes.
Harkening back to the Trump administration’s rule, which has now been rescinded, the legislation would require investment advisers and ERISA retirement plan sponsors to prioritize financial returns over non-pecuniary factors when making investment decisions on behalf of their clients.
The bill includes provisions that would amend ERISA to specify that a retirement plan fiduciary shall be considered acting solely in the interest of the participants and beneficiaries only if:
1. the investment does not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to other objectives, including ESG objectives; and
2. the fiduciary does not sacrifice investment return or take on additional investment risk to promote goals unrelated to the plan or purposes of the plan.
The bill does allow for investment options that use “non-pecuniary” factors to be used in a brokerage window, provided certain conditions are met. It also provides some leeway for ESG factors to be considered through a “tiebreaker test,” but would require stringent documentation requirements among fiduciaries. It also would specifically prevent so-called non-pecuniary ESG factors from being used for default investment options.
In addition, the bill would amend the Investment Advisers Act to specify that pecuniary factors may not be subordinated to or limited by non-pecuniary factors in determining whether an investment advisor is acting in the best interest of a customer—unless the customer provides informed consent, in writing, that such non-pecuniary factors be considered.
Finally, the newly introduced bill authorizes several studies to assess the impact of ESG investing on the underfunding of state and local pension plans, ESG disclosures in the municipal bond market, and the effectiveness of SEC rules prohibiting political contributions in connection with the
solicitation of municipal securities business and the degree to which public pension authorities’ embrace of ESG investing strategies has influenced political contributions. Said Rep. Barr in a press release:
Asset managers should be in the business of maximizing returns for investors, not pushing their own political agenda at the expense of everyday Americans. Our proposed legislation safeguards the savings efforts of hardworking Americans. This critical legislation not only guarantees that advisers make prudent investment choices based on financial factors, but also empowers savers to decide how their money is invested, contrary to the Department of Labor's (DOL) finalized rule.
The bill was referred to the House Financial Services Committee and the House Education and the Workforce Committee. Reps. Barr and Allen had previously introduced their ESG Act in March 2022.
In addition, Rep. Barr had previously sponsored a Congressional Review Act (CRA) resolution to nullify the DOL’s ESG rule—“Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights”—which became effective Jan. 30, 2023, but passage of that resolution resulted in the first veto of the current administration.
In the meantime, the DOL continues to defend its rule and recently pushed back on a lawsuit filed by a coalition of 25 state attorneys general that challenged the ESG regulation.
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