Biden Administration Expected to Weigh In on ESG Investments

A new administration taking office in January could mean the rollout of highly anticipated guidance and clarity on environmental, social and governance (ESG) investing.

The effects of COVID-19 renewed interest in sustainable investing for many U.S. investors. But a proposed rule the Department of Labor (DOL) released in June seemed to put a damper on ESG investing. The department’s final rule, published in October, softened that stance somewhat, saying that retirement plan fiduciaries should only use “pecuniary” factors when assessing investments of any type.

President-elect Joe Biden and his administration could attempt to issue guidance supporting ESG investing despite the rule, says Aron Szapiro, head of policy research at Morningstar. Because the DOL’s final rule did not specifically implement any requirements for sustainable investments, a new administration could issue sub-regulatory support for ESG funds, he says.

“The final rule doesn’t necessarily reference ESG, except in the preamble, so that suggests to me that [the Biden administration] could come up with some sort of sub-regulatory guidance to signal that it is more accommodating toward ESG investing,” Szapiro says.

A Morningstar article, which Szapiro helped write, notes that the new administration could issue such guidance in the form of frequently asked questions (FAQs) or advisory opinions, since ESG factors could be considered pecuniary and could be reviewed by plan fiduciaries as a measure of their fiduciary duty.

Ed Farrington, executive vice president of institutional and retirement business at Natixis Investment Managers, says the preamble to the DOL rule might create confusion for plan sponsors who want to integrate ESG investments into their plans. He says he expects the Biden administration will likely address the uncertainty, even without revamping the rule.

“The rule may likely stay close as is,” he says. “But pieces might be given new indications from the department, to signal to a plan sponsor that this is something that you can, and probably should, do.”

Farrington predicts the Biden administration will emphasize sustainable investing throughout the next four years. Biden’s push to rejoin the Paris Agreement, along with his goals of achieving a net-zero economy by 2050, underscore his approach on sustainability through 2024, Farrington says. “The tone that has been set—should that be followed through with policy—sets a very [foundation] for a strong trend over the coming years,” he adds.

Similarly, the Biden administration will have the opportunity to replace the outgoing Securities and Exchange Commission (SEC) chair, along with the head of the Commodity Futures Trading Commission (CFTC). A recent piece by Russell Investments notes that a new SEC chair might be tasked with requiring public companies to disclose climate change-related financial risks and greenhouse gas emissions in their operations, further enforcing a sustainable environment.

Additionally, Morningstar says there could potentially be a 3-2 Democratic majority in the SEC in the future, including the acting chair. Such a majority could revise several rules related to proxy voting rights and climate-related financial disclosures. Even if the Democratic Party does not win the two Georgia Senate runoff elections next month, many industry experts are still optimistic about the prospect of regulatory support concerning ESG investing, Szapiro says. Yet, if that’s the case, Republican support will be integral to many of the Biden administration’s goals, especially on sustainable investing.

“I think all of the commissioners recognize some sort of additional guidance” is needed, Szapiro says, “But, what would be really meaningful change will take rulemaking that I don’t think is going to be acceptable to two of the [SEC] members right now, so you really would need a fifth vote.”