The biggest trade group for pension professionals urged the Labor Department to clarify a proposed rule to allow retirement plan advisers to consider environmental, social and governance factors when selecting investments, saying it may increase legal risks.

The American Retirement Association, which represents more than 27,000 actuaries and plan administrators, as well as insurance professionals, financial advisers and others, said it’s concerned there could be added legal risks for advisers evaluating investment plans if they fail to consider the economic effects of climate change and other ESG factors.

The proposal would undo the Trump administration’s changes in implementing a law governing a broad range of retirement and health benefit plans. It would amend the rule’s safe harbor for investment prudence duties by adding language to the factors that fiduciaries are required to consider. ARA warned the amendment’s language could have unintended consequences on advisers responsible for selecting investments for plans covered by the 1974 Employee Retirement Income Security Act, or ERISA.

“While nothing in the proposal gives fiduciaries license to pursue ESG objectives unmoored from or indifferent to an investment’s underlying economic merits, the ARA is concerned that the phrase ‘may often require,’ included in the required considerations, taken together with the Proposal’s preamble, strongly implies that fiduciaries not only have the option to consider ESG investments but should be considering climate change and other ESG factors,” the group said in a letter sent last month. 

Although ARA said it agrees with the proposed rule’s intent to ensure plan advisers can direct investments into ESG options more freely, the organization is concerned that advisers would have a new burden to show why ESG factors were not considered in selecting investments due to the safe harbor regulation. That creates a slippery slope for advisers overseeing larger plans, who view avoiding the risk of litigation as a top priority in demonstrating prudence when selecting plans, it said.

“We cannot emphasize enough how sensitive these stakeholders are to possible litigation risk,” ARA said. “This means that any language, reasonably read, implying, or even suggesting a particular course or fiduciary approach will be perceived as a directive and will be reacted to as such.”

Republican concerns

Senate Republicans have also raised concerns, bashing the department’s proposal as “deeply flawed” and saying the 2020 Trump rule added much-needed protection to millions of Americans’ retirement savings.

The proposal “imposes a de facto mandate on fiduciaries of retirement plans, requiring them to consider ESG factors that are not supported by DOL’s own regulatory impact analysis, and the steps needed to comply with the obligation are unclear and ambiguous,” Sens. Patrick J. Toomey of Pennsylvania, Michael D. Crapo of Idaho, Richard M. Burr of North Carolina and Tim Scott of South Carolina said in a letter sent last month to Labor Secretary Marty Walsh.

AARP, an advocacy group for people over the age of 50, asked the department to prevent plan fiduciaries from sacrificing ERISA-mandated considerations such as investment return or risk management so they can invest in ESG options. The organization, which has 38 million members, said the department should emphasize that the proposal does not establish a fiduciary standard that is less stringent than the statutory standard.

“As the Department recognizes throughout its proposal, the duty of loyalty is one of ERISA’s fundamental bedrock principles to protect participants and beneficiaries. The use of ESG factors in the selection of investments should be consistent with the duty of loyalty,” David Certner, AARP’s legislative counsel and legislative policy director, said in a Dec. 13 letter. 

“Indeed, these factors should be evaluated as a matter of course if they impact a fiduciary’s analysis of the economic and financial merits of a particular investment, competing investment choices, or investment policy, just like a myriad of other factors that may be material to investment value and risk and return,” he said.

The Labor Department’s Employee Benefits Security Administration made the proposal in October. The rule would affect some $12.2 trillion in investments held by ERISA-covered plans.

The proposed rule is critical to undo the chilling effect on retirement advisers from considering ESG options from the previous administration’s final rule, Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration, told reporters at the time. 

It would also modify the so-called tie-breaker standard, which focuses on whether the competing investments are indistinguishable based on consideration of risk and return. The Labor Department suggested the current provision could be interpreted too narrowly, and said the proposed standard would be broader and apply when a fiduciary faces competing choices that “equally serve the financial interests of the plan.”

ESG investors and Democrats welcomed the rulemaking, saying the guidance will help satisfy retirement savers’ growing appetite for ESG investments. Advisers also see the proposal as a way to get on the same level as retail and institutional investors that already look at ESG factors alongside traditional financial metrics.

“We applaud the Department for issuing the Proposal. Fiduciaries must be permitted to evaluate all factors that impact risk and return, including climate change risk,” said Mindy Lubber, CEO of Ceres.

“Climate related disasters are increasingly frequent, with a record 22 events, each of which has resulted in over $1 billion in damage, in the U.S. during 2020 alone, for a total cost of $100 billion,” she continued. “Physical and transition risks caused by climate change are already impacting, or will impact, nearly all sectors of the economy.”