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Legislation Would Mandate ESG Policies Among Retirement Plans, Advisors

ESG Investing

Unhappy with the Department of Labor’s regulatory efforts to curtail environmental, social and governance investing, a group of House Democrats introduced two bills requiring retirement plan fiduciaries and investment advisors to adopt sustainable investment policies. 

Introduced Dec. 14 by Rep. Andy Levin (D-MI), Vice Chair of the House Education & Labor Committee, along with Reps. Brendan Boyle (D-PA) and Cindy Axne (D-IA), the Sustainable Investment Policies Act and the Retirees Sustainable Investment Policies Act together would require plan investors and fiduciaries to establish sustainable investment policies that consider ESG factors when making investment decisions.

In introducing the legislation, the lawmakers specifically point to the DOL’s recently finalized regulation preventing plan fiduciaries from selecting investments based on non-pecuniary considerations and requiring them to base investment decisions on financial factors, noting that the department received more than 8,000 comments with most being in opposition to the proposal. 

Retirees Sustainable Investment Policies Act

More specifically, the Retirees Sustainable Investment Policies Act would require ERISA-covered retirement and welfare benefit plans to adopt and implement sustainable investment policies in consideration of ESG factors, unless the plan elects to rely on the sustainable investment policies of a plan’s 3(38) fiduciary. The bill specifies that a sustainable investment policy shall include guidelines with respect to entities in which the plan invests, including:

  • corporate governance practices;
  • characteristics of workforces employed by such entities;  
  • labor and human rights compliance; 
  • environmental risks to the assets and properties of the entity;  
  • due diligence and practices regarding supply chain management; and 
  • tax practices, including international tax avoidance strategies and tax payment disclosure.

Moreover, the legislation clarifies that ERISA Section 404(a) shall not be construed to prohibit a plan fiduciary—in choosing among investments with commensurate degrees of risk and rates of return—to select one or more such investments based on ESG considerations; or to monitor or dispose of a plan investment based on ESG considerations.

The bill would also allow vote proxies in accordance with the plan’s proxy voting guidelines. Furthermore, it specifies that a QDIA may include an investment alternative selected in part based on ESG considerations. Plans would also be required to conduct an annual review of their sustainable investment policy.

Sustainable Investment Policies Act

Noting that DOL and SEC policies have created confusion as to fiduciaries’ obligations and had a chilling effect on ESG integration, the Sustainable Investment Policies Act would require large investment advisors to adopt and implement policies to consider ESG factors when making investments.

In this case, the legislation would amend Section 203 of the Investment Advisers Act to specify that no person may be registered as an investment adviser unless the person submits and follows a sustainable investment policy with the SEC. The guidelines that would apply to investment advisers appear to match with the guidelines specified in the Retirees Sustainable Investment Policies Act. 

The bill would also require that each RIA contract with an auditor to perform an annual evaluation of the adviser’s compliance with the policy and such auditor shall file a report to the adviser and the SEC. 

Current Marker 

The American Retirement Association submitted a comment letter regarding the DOL’s proposal, stating that it does not believe that DOL guidance should promote or prohibit a fiduciary from considering an otherwise prudent investment simply because it includes ESG factors. Thus, it is likely the ARA would not support legislation mandating sustainable investment policies. 

While this legislation will not be acted on in the current Congress, it is worth noting that Rep. Levin has been cited in numerous reports as being under consideration to serve as Labor Secretary, overseeing the Department of Labor for the incoming Biden administration. Should that happen, Levin would have a direct role in overseeing—and perhaps revisiting—any recently promulgated rules by the DOL.