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On day one of the new Biden-Harris Administration, among a flurry of executive orders, President Biden ordered the review of a controversial Department of Labor rule heldover from the previous administration. The “Financial Factors in Selecting Plan Investments” rule (the ESG rule) repudiates a current investment trend known as ESG: environment, social, and governance. The Trump Administration rule requires the selection of investments specifically “based on pecuniary factors, described as any factor that a fiduciary prudently determines is expected to have a material effect on the risk and return based on appropriate investment guidelines,” according to the online publication Pensions&Investments. The review ordered by President Biden calls into question the Trump Administration’s decision to restrict 401(k) plan fiduciaries from applying ESG investing principles.
What is ESG? As Georg Kell explains in his Forbes article entitled, The Remarkable Rise of ESG:
“ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis, yet may have financial relevance. This might include how corporations respond to climate change, how good they are with water management, how effective their health and safety policies are in the protection against accidents, how they manage their supply chains, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation.”
In short, incorporating ESG factors into investment strategy involves considering issues that concern the greater good and may not always have a direct, measurable financial impact.
How prevalent is ESG investing? ESG is a big deal in the investment world because of its scope. Jennifer Howard-Grenville notes in the Harvard Business Review that, “around the globe, a third of all professionally managed assets, or roughly $30 trillion, are now subject to ESG criteria.” “That’s a remarkable sum,” she continues, “one that represents an increase of more than 30% since 2016.” In light of ESG’s wide reach, the Trump Administration’s decision to restrict 401(k) plan fiduciaries from applying ESG investing in its “Financial Factors in Selecting Plan Investments” rule drew some intense scrutiny. As noted in MarketWatch, “a group of investor organizations and financial firms analyzed the more than 8,700 public comments on the proposed rule and found that only 4% of comments expressed support.”
Why is the Biden Administration’s decision to review the ESG rule important? The backlash against the Trump Administration’s ESG rule is not surprising given the growing global trend toward corporate diversity, equity, and inclusion (DEI) commitments. In New York City, for example, the comptroller launched a 2020 campaign calling on organizations to publicly disclose DEI data through releasing their annual Employer Information (EEO-1) Reports. Many major firms, including Coca-Cola, Citigroup, Visa, Pfizer, Morgan Stanley, PepsiCo, Starbucks, Target, MasterCard, and Verizon responded to the comptroller’s call by committing to do so. Another prominent example of corporate commitment to DEI occurred last year when many corporate voices rallied behind the Black Lives Matter movement.
As President Biden’s administration hits the ground running, the decision to review the ESG rule provides a strong indication of his policy priorities. Employers should expect more DEI initiatives from the President in the days to come.
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