Investors expect repeal or rewrite of Trump rule on ESG

The controversial Department of Labor ruling, taking effect a week before Biden took office, is in the sights of the new team

A snow-covered boardwalk in Yellowstone National Park. Photo: Christopher Michel/flickr.

(Robert Powell, CFP, is the editor of TheStreet's Retirement Daily, a columnist at USA Today; and host of the Callaway Climate Insights podcast.)

BOSTON (Callaway Climate Insights) — Out with the old and in with the new when it comes to environmental, social or governance investments.

In the waning days of the Trump administration, the Labor Depart put in place a rule preventing ERISA plan fiduciaries from investing in “nonpecuniary” vehicles that sacrifice investment returns or take on additional risk.

That rule, Financial Factors in Selecting Plan Investments, also know as the ESG rule, was finalized in November and took effect Jan. 12.

But the rule is likely to undergo some changes in the coming months if not weeks.

President Joe Biden signed an executive order on his first day on the job directing all executive departments and agencies “to immediately review and, as appropriate and consistent with applicable law, take action to address the promulgation of federal regulations and other actions during the past four years that conflict with these important national objectives, and to immediately commence work to confront the climate crisis.” Read Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis.

And advocates of ESGs funds are overjoyed.

Best case, some see it being repealed. “All we have seen shows that it will most likely be repealed,” said Jeffrey Gitterman, the co-founding partner and creator of Sustainable, Impact, and ESG Investing Services at Gitterman Wealth Management. “It is the one item in his DOL agenda.”

Others meanwhile foresee three possible outcomes to the Labor Department’s review of the rule. “If I had to bet — and believe me, my crystal ball is made of obsidian — I’d say that there are three things they could do,” said Julie Gorte, senior vice president for sustainable investing at Impax Asset Management. 

First, it’s possible the Labor Department will leave the rule in place and just not enforce it, at least not for a while.

More likely, in Gorte’s opinion, is that the Labor Department will propose a new rule that will take any taint of financial inferiority out of the term ESG for ERISA plans. “They used to do that with guidance, but now that there’s a rule, guidance is not a possible fix; they’d have to do a rule.”

“And third — and this is something the administration could do, but I’ve not seen anyone talk about it — they could create a legislative response, something that would take decisions like this — for example, anything incorporating sustainability into financial management — out of agency hands,” she said. 

To be fair, the Labor Department rule that took effect was a watered down version of the proposed rule, says Bob Dannhauser, a senior adviser to The Investment Integration Project.

The current rule, he said, focuses on requiring the use of pecuniary factors — the things that have a material impact on performance. “ESG investors are used to making that case, and the more sophisticated investors have already adjusted their risk management toolboxes to include ESG risks,” he said. “The DOL rule might be more chilling to ‘impact’ investors who seek important environmental and/or societal changes through their investments.”

According to Dannhauser, incoming Labor Department Secretary Marty Walsh, who most recently served as mayor of Boston, is thought to be friendly to a more progressive view of ESG’s role in investment analysis. Boston had an ESG Investment Initiative. “But the Labor Department agenda is crowded with pandemic-related issues, so I’d expect maybe some sub-regulatory moves like guidance to be issued shorter term and more comprehensive regulatory reform later,” Dannhauser said.

Meanwhile, Dannhauser said the executive order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis includes the creation of what looks like a pretty high-powered Interagency Working Group on the Social Costs of Greenhouse Gases. “That group will focus on the monetary effects of increases in greenhouse gas emissions, methane, carbon and nitrous oxide,” he said. “Pretty much the same kind of analysis that smart investors are looking at with the federal government’s imprimatur and Day One administration attention — very promising!”