New legislation, the Freedom to Invest in a Sustainable Future Act, was introduced Thursday by Representative Suzan DelBene, D-Washington, would codify the key elements of the controversial Department of Labor rule permitting environmental, social and governance considerations in retirement plan investing, which went into effect on January 30. The legislation is co-sponsored the co-founders of the Sustainable Investment Caucus, Representatives Sean Casten, D-Illinois, and Juan Vargas, D-California.
The bill would amend the Employee Retirement Income Security Act of 1974 to permit the consideration of ESG factors in retirement plan investing. It would also amend ERISA to include the updated “tiebreaker” rule: If a sponsor is deciding between multiple investment options, they could use “collateral” ESG factors if competing options would otherwise serve equally “the plan’s economic interests.”
This tiebreaker phraseology of “serve equally” is understood as a lower legal barrier than the phrasing of Trump-era the DOL rule from 2020, under the administration of President Donald Trump, which said that in order to consider collateral factors as a tiebreaker, competing investments must be otherwise indistinguishable.
Again in keeping with the new rule, and in contrast to the Trump-era rule, the bill explicitly does not require additional documentation. The bill reads: “A fiduciary shall not be required to maintain any greater documentation, substantiation, or other justification of the fiduciary’s actions relating to such fiduciary act than is otherwise required.”
This point on documenting requirements was a key element of a lawsuit brought in Wisconsin on Tuesday which challenges the legality of the DOL’s ESG rule. That lawsuit alleges that by not requiring documentation of collateral considerations, fiduciaries can avoid leaving a paper trail which could then be used against them later in litigation.
Since the two open complaints—including one brought in North Texas by 25 states—against the DOL rule challenge its consistency with ERISA, the proposed bill would obviate that objection by amending ERISA to effectively incorporate the DOL rule.
The representatives who back the bill have put forward two reasons to support it: ESG is a sound financial methodology, and ESG principles can make investing more environmentally and socially responsible.
DelBene emphasized both components in a statement, saying that, “Americans deserve a secure retirement and ESG investments can be a key component in accomplishing that goal. This bill would help provide workers and retirees a pathway to reach that secure retirement and invest in a sustainable world for future generations.”
In the same statement, Casten emphasized the intersection of financial returns and ESG and said, “Climate risk is financial risk. Retirement plan fiduciaries should be free to consider climate change and other ESG factors without regulatory barriers or the threat of litigation. I’m proud to support this legislation that gives workers the option to invest in the best plans for their future.”
Democrat supporters of ESG in Congress often take what might be called the “happy coincidence” thesis, which says that considering ESG factors is good for investing and risk management, as required by ERISA, and that it also makes the investment sector more environmentally and socially conscious.
The bill would have to pass the Republican-controlled House of Representatives before being taken up by the Democrat-majority Senate. The bill has not been assigned to a Congressional committee yet, but it is likely to be referred to the House Financial Services Committee.