As the Joe Biden plans his administration's transition and specific Trump-era regulations it will rollback, officials will move to “markedly improve” the regulatory climate for sustainable investing at both the U.S. Department of Labor and Securities and Exchange Commission, Morningstar director of Sustainability Research Jon Hale said in an interview.
Specifically, Biden's DOL will look to clarify if not reverse a Trump administration rule that limits the use of ESG funds in retirement plans regulated under ERISA, Hale said.
“I think the Biden DOL will issue guidance to weaken the worst parts of the ESG rule and give the new agency time to clarify its positions,” Hale told Financial Advisor Magazine. “Because the agency passed a final rule, it takes a while to write a new rule and get it passed. In the meantime, I don’t see a Biden DOL enforcing the rule, at least not as strongly as the current DOL would."
The final ESG rule “has a fair amount of ambiguity. For instance, the rule asserts that there are funds out there that have as their objective some kind of nonpecuniary benefit. I’m not really sure what that means,” Hale said.
As a result, a Biden DOL will make it clear that material ESG factors are indeed pecuniary and can be considered by plan fiduciaries as part of their fiduciary duty, similar to that imposed by the Obama DOL rule in 2015.
A Biden DOL will also take a less skeptical view of ESG strategies that offer collateral benefits alongside financial return and put less scrutiny on the “all things equal” standard the current rule asserts, by allowing advisors and plans to select ESG strategies as long as their risk/return characteristics are comparable to conventional alternatives covering the same asset or sub asset class, Hale said.
Reversing ESG limitations is also important to the investment lineup of the Federal Thrift Program, which was poised to add ESG options prior to the DOL’s ESG rulemaking efforts, Hale said. The plan for U.S. civil servants and employees had $769.1 billion in assets in June, making it the largest defined contribution plan in the world.
“I think if the DOL ESG rule stays on the books it would have a chilling effect. Plans are very risk adverse,” Hale said. “It’s important for whomever is in the DOL to issue guidance.”
In addition to appointing a new Labor secretary and head of its Employee Benefits Security Administration, Biden will also appoint a new SEC chairman. The appointment will give Democrats at the SEC a 3-2 majority, which will allow them to revisit several rules that impacted ESG investing in the past two years, Hale said.
In a move earlier this year that blocked some investors from using the proxy-voting process to force companies to adopt sustainability practices, the SEC passed rules that raised ownership thresholds for mounting a proxy vote. While the two sitting Democratic-appointed commissioners opposed these moves, the new Democrat majority would allow the SEC to reverse this rule, Hale said.
A Democrat chairman and majority also allows the SEC to require public companies to disclose climate-related financial risks and greenhouse gas emissions and consider widening the scope of mandatory disclosures to include all financially material social and environmental risks, as requested by a wide range of investors in a 2018 petition signed by sustainability trade academics, experts and trade groups, Hale said.
The SEC, under Trump, has shown little interest in the subject, despite pressure from investor groups and the SEC’s Investor Advisory Committee, the senior Morningstar manager said.