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Labor Department mulls more climate rules for retirement plans

The department seeks information to determine if funds could do more on climate risk

The Labor Department is asking for information that could be used to protect retirement plans and pensions.
The Labor Department is asking for information that could be used to protect retirement plans and pensions. (Caroline Brehman/CQ Roll Call file photo)

The Labor Department signaled it could pursue additional rules to shield retirement savings and pensions from climate-related financial risk, furthering its commitment to ensure plan sponsors consider environmental, social and governance factors in investment decisions.

The department last month issued a notice asking for information to help determine what actions the Employee Benefits Security Administration could take to ensure sponsors protect retirement contribution plans, such as 401(k) plans and pensions, from physical risks and transition risks of climate change.

While it is too early to know what guidance or rule-making could rise from the request for information, the department’s solicitation will likely cement climate as part of a larger set of factors that plan fiduciaries must consider under laws known as the Employee Retirement Income Security Act of 1974 and the Federal Employees’ Retirement System Act of 1986.

“The DOL may seek to use this information to shape its interpretation of ERISA’s fiduciary duties and the extent to which non-financial factors, such as environmental factors, may be considered as part of an ERISA fiduciary’s investment decisions,” Elizabeth S. Goldberg and Rachel Mann, lawyers for Morgan, Lewis & Bockius, said in a client note.

“Though the focus and nomenclature has changed, the DOL has been consistent over the many years of regulatory ping-pong in affirming that plan fiduciaries must make investment decisions in accordance with ERISA’s two key fiduciary duties of loyalty and prudence,” they wrote.

The request for information underscores the growing pressure from ESG investors and Democrats for federal agencies to integrate climate risk into financial regulations, and from the White House to fulfill President Joe Biden’s executive orders for an all-hands-on-deck approach on climate action. The Labor Department is finalizing a rule that would allow sponsors to consider ESG factors when selecting investments for retirement plans covered by ERISA.

Data quality

About half of the questions on the Labor Department’s Feb. 14 notice specifically pertain to how the department and retirement plans could collect and report data on climate risk, vet for its quality and factor that information into investment decisions. Ensuring the methodology and quality of data and subsequent disclosure would be the foundation in any proposal from the department, according to investors, plan sponsors and others.

“From [an] ERISA fiduciary perspective, this is a daunting challenge, because the data sets are full of heterogeneity,” John Quealy, chief investment officer at Trillium Asset Management, said in an interview. “ESG data is not like financial data that is pretty much dictated by statutes in whatever country you’re in and is consistent.”

Plan fiduciaries want to be sure that the data they use is reliable, verified and standardized across the board to confidently make decisions in their portfolios, said Quealy, whose Boston-based ESG-focused firm manages $5.6 billion in assets. Investors in the U.S. largely rely on corporations’ assertions that their voluntary ESG metrics are sound.

“Security-level, company-level disclosure really needs to drive a lot of this,” Quealy said. “Then, to the heart of this RFI, once that happens, what are the data sets and how you report it are a little bit easier questions to answer.”

One way the Labor Department could ask for climate risk data on pension plans is through Form 5500, annual reports that retirement plans fill out to ensure they are in compliance with ERISA, the IRS and various statutes.

According to the RFI, the department could amend Form 5500 to ask questions about what metrics service providers use to disclose climate-related financial risks in retirement plans, how plan investment policy statements address climate risk and how plan fiduciaries voted on proxy proposals related to climate risk.

Using an existing form would make a lot of sense to report and be transparent on underlying investments in activities, Quealy said.

“This will provide an impetus for those companies, as they’re held in many different types of investment vehicles across the country, to get those disclosure out,” he added.

Another area that has caught the attention of investors, plan sponsors and industry groups is the notice’s focus on the Thrift Savings Plan, a $762 billion defined contribution plan akin to a 401(k) for most federal government workers. The RFI asked for feedback on whether the federal retirement savings plan, which has over 6 million participants, should consider climate risk and other ESG factors.

“It’s the largest plan in the United States, so it’s a big mover,” said Bryan McGannon, director of policy and programs at US SIF: The Forum for Sustainable and Responsible Investment. The organization is composed of advisers, firms and banks that support sustainable investing.

The Thrift Savings Plan will also allow its participants to buy mutual funds, including ESG ones, in addition to the plan’s five core funds and other target date funds, McGannon said in an interview.

The plan’s board has also been under pressure to consider climate as a long-term financial risk. Last year, at the request of Sens. Jeff Merkley, D-Ore., and Maggie Hassan, D-N.H., the Government Accountability Office released a report recommending the Federal Retirement Thrift Investment Board “conduct a rigorous audit” of the potential impact of climate-related risks on the plan’s investments.

“It’s such a big part of the retirement space in America, it would be a very strong signal throughout the entire retirement space if they did something on climate risk,” McGannon added.

The Labor Department’s focus on climate risk has garnered criticism from the American Retirement Association, which represents more than 27,000 actuaries and plan administrators, as well as insurance professionals, financial advisers and others. 

“To single out one economic issue versus the many others is really sending the wrong message to plan sponsors and trustees,” said Brian Graff, chief executive officer of ARA. “Climate is important, but so are a lot of other things.” 

In an interview, Graff said plan sponsors should consider climate risk in their analysis when selecting investments. He worries that guidance or rules that add requirements on evaluating climate risk would become too prescriptive and may cause plan sponsors to narrowly focus on certain risks over others, hindering long-term investments.

“Investing needs to be broader in terms of its analysis, including climate change,” Graff said. “But by overemphasizing climate change, the concern is that it’s deemphasizing other potential issues.”

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