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Senator Explains Reasoning Behind Pro-ESG Bill: ARA Exclusive

ESG Investing

Sen. Tina Smith (D-MN) recently reintroduced legislation—the Freedom to Invest in a Sustainable Future Act (S. 523)—to provide “legal certainty” to plan sponsors and fiduciaries who wish to offer environmental, social, and governance (ESG) investment options in retirement plan menus. 

While many industry watchers see it as a non-starter given Republican opposition to the strategy, it’s meant to codify and further support the Biden Administration’s “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, which went into effect on January 30. The bill’s language mirrors much of what’s included in the rule. 

“I believe that environmental, social, and governance factors can impact investments and workers ought to be able to take them into consideration when they’re planning for a secure retirement,” Smith told the National Association of Plan Advisors (NAPA) on Thursday. “But for too long, workplace retirement plans that want to offer sustainable investment options have been subject to regulatory seesawing with changing administrations.”

It’s why she introduced the bill, “one that would codify a neutral, free-market approach and provide the basic legal certainty needed to make sure workplace retirement plans are able to offer these options to the workers that want them.”

Noting the now-rescinded Department of Labor rule issued under President Donald Trump, she argued that the uncertain and regularly changing legal environment is one of the primary issues hindering plans that want to offer sustainable investment options.

The new rule is the subject of two legal challenges and the target of a Congressional Review Act resolution. A coalition of 24 states filed suit to stop it just days before it was to go into effect.

More specifically, the coalition, led by Texas Attorney General Paxton, says in a press release that the 2022 Rule “undermines key protections for retirement savings of 152 million workers—approximately two-thirds of the U.S. adult population and totaling $12 trillion in assets—in the name of promoting environmental, social, and governance (‘ESG’) factors in investing, including the Biden Administration’s stated desire to address climate change.

Filing it in Texas with the Fifth Circuit Court of Appeals, which famously struck down the Obama Administration’s fiduciary rule in 2018, wasn’t lost on observers. Jason Miyares, Virginia’s Attorney General, said it was part of a deliberate strategy.

“Texas is one of the lead states,” Miyares, a party to the suit, explained. “You’ve seen a lot of litigation against the Biden Administration in the Fifth Circuit, and it made strategic sense to start the process there.”