Both supporters and opponents of greater disclosure on climate-related financial risk are urging the Labor Department to complete its current agenda before pursuing additional rules to protect retirement savings and pensions from climate risk.
Despite differing rationales, parties in opposite camps are urging the department to avoid a scattershot approach that would overlap with the Securities and Exchange Commission’s proposed climate risk disclosure rule.
Investors and organizations focused on environmental, social and governance issues say the department’s Employee Benefits Security Administration should adopt a proposed rule expanding plan sponsors’ ability to consider climate risk and other ESG factors in their investments before the agency considers requirements to disclose more information on climate risk.
Once finalized, the rule, which was proposed in October 2021, would reverse the Trump administration’s changes in implementing the Employee Retirement Income Security Act of 1974, a law that governs a broad range of retirement and health benefit plans.
That Biden rule would boost ESG options in retirement plans and restore advisers’ ability to utilize their shareholder rights. ESG proponents say the change is necessary to lay the groundwork for other rule-making the Labor Department might consider.
“The most important action for DOL to take to protect the life savings and pensions of workers from the threats of climate-related financial risk is to finalize the proposed rule ‘Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,’” said Lisa Woll, CEO of US SIF. The organization is composed of advisers, firms and banks that support sustainable investing, with members representing $5 trillion in assets under management.
The Employee Benefits Security Administration is collecting feedback on steps to ensure sponsors protect retirement contribution plans from physical risks and transition risks of climate change. Federal agencies across the board are under pressure to fulfill President Joe Biden’s executive orders for an all-hands-on-deck approach on climate action, especially as Democrats’ legislative efforts face opposition.
ESG supporters are urging the agency to finish the work it’s already started.
“The proposal, when finalized, will remove the historical regulatory barriers that have made ERISA fiduciaries reticent to consider ESG criteria and make sustainable options more widely available,” Woll said in a letter last month to Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration.
Some 27 impact investors and financial services firms, including Adasina Social Capital, Boston Trust Walden and Domini Impact Investments LLC, co-signed the letter. Shareholder advocate As You Sow, the Teachers Insurance and Annuity Association of America, sustainability nonprofit Ceres and divestment proponents echoed those sentiments.
“The physical and transition risks that climate change poses to global financial markets as a whole are meaningful for retirement plan participants because many retirement funds invest in diversified portfolios that reflect the broader economy,” TIAA said. “While specific climate risks may vary by company or industry, a retirement saver who has invested in a diversified portfolio will be exposed to many of these various climate-related challenges to some extent."
'Against the spirit' of ERISA
Industry associations that represent large companies and plan sponsors, including the ERISA Industry Committee, the American Retirement Association and American Council of Life Insurers, expressed concerns that any rule-making singling out climate risk as a unique investment risk would go against the spirit of ERISA.
“The DOL has provided significant, and at times conflicting, guidance over the past nearly four decades, on factors important for investment decisions,” said Taylor French, a partner at McGuireWoods LLP and Rosemary Becchi, strategic adviser and counsel for Brownstein Hyatt Farber Schreck. “Consistently throughout such guidance, the DOL reiterated that fiduciaries have an obligation to not focus on any one single risk but must focus on all risks collectively.”
Representing an undisclosed number of major public companies and private employers, French and Becchi said in a letter to Khawar last month that ERISA fiduciaries should consider climate risk, along with other financial and ESG risks, in investment decisions. However, they said the Labor Department’s solicitation for comments on additional rules “is too narrow and undermines the importance of other financial risks, which is in direct conflict with a fiduciary’s obligations under ERISA.”
ESG proponents, including US SIF and TIAA, and even some investment firms looking to market more climate-friendly investment plans for retirement savers agreed with skeptics and trade associations that the department should forgo collecting and reporting data on climate risk from plan sponsors.
That was a predominant focus of the department’s request for information. The notice inquired about whether it should ask for climate risk data on pension plans through Form 5500, annual reports that retirement plans fill out to ensure they are in compliance with ERISA, the IRS and various statutes.
But investors and trade groups warned that amending Form 5500 would burden smaller plan sponsors and run up against the SEC’s work on standardizing disclosures on climate risks from public companies. The SEC proposed its rule in March to create an apples-to-apples comparison on key metrics, such as emissions, among registrants and provide the most significant update on climate-related financial risk since the SEC’s 2010 guidance.
“U.S. public companies are not yet required to make disclosures about environmental, social and governance factors, so the datasets necessary for robust evaluation of climate change can be difficult to obtain,” said Margaret Raymond, vice president and deputy general counsel of T. Rowe Price Group Inc. and its investment advising arm T. Rowe Price Associates Inc. The company has defined contribution retirement plans making up about 42 percent of its $1.69 trillion assets under management.
“Greater transparency by public companies about the impact of climate change on their financial future would be needed before anyone responsible for investments, including ERISA fiduciaries, could be charged with special obligations to assess impacts of climate change,” Raymond added.