The Biden administration has reversed a controversial Trump-era rule that barred plan fiduciaries from considering climate change and other environmental, social, and governance (ESG) factors when choosing retirement investments and exercising shareholder rights, such as proxy voting. 

A final rule issued by the Department of Labor (DOL) on Nov. 22 removes restrictions issued in two 2020 rules that generally required plan fiduciaries to select investments based solely on consideration of “pecuniary factors.” In its 2020 rules, the Trump administration defined “pecuniary factors” as “any factor” that the “fiduciary prudently determines is expected to have a material effect on risk and/or return of an investment based on appropriate investment horizons consistent with the plan’s investment objectives and funding policy.” The rules were tailored, however, to “ensure that retirement plan fiduciaries focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives.” 

The Biden administration on Tuesday said that after consulting extensively with a wide range of stakeholders, it concluded that the 2020 DOL rules “unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.” 

“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social, and governance actions as they help plan participants make the most of their retirement benefits,” said Secretary of Labor Marty Walsh in a statement on Tuesday. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”

ESG’s Complex Implications for Power

The DOL rule, which is slated to be effective 60 days after its publication in the Federal Register, is a big win for the renewables sector, noted the American Council on Renewable Energy (ACORE). Gregory Wetstone, ACORE president and CEO, said the pan-renewables group had “forcefully pushed back” on the “unpopular” Trump-era rules, which “were intentionally designed to override the free market and hamstring ESG investing, one of the nation’s fastest-growing finance trends.”

As POWER has reported, ESG criteria have quickly evolved over the past few years into a central measure that an increasing number of utilities, investors, and corporations have adopted to gauge corporate performance, risks, and progress toward sustainability targets. “ESG has formalized how companies are measured from the investors and stakeholders perspectives, including communities, regulators, and even their own employees,” noted Dan Hahn, partner at consultancy group Guidehouse, in August.

However, heightened pressure from investors that is informed by ESG has also prompted financial institutions—including banks, insurers, and brokers—to halt financial support or coverage for fossil fuel projects, including from the coal and gas power sector. ESG considerations may also have negative credit implications for all utilities that own generation owing to their high exposure to extreme weather and climate risks, credit ratings agencies have said.

Investor-owned utilities are also concerned about how rules mandating climate-related risks and governance disclosures will weigh on businesses. In March, the Securities and Exchange Commission (SEC) proposed a broad new rule that requires registrants to disclose climate-related risks. While the SEC has not yet issued a final rule, industry observers suggest possible implications for the power sector if the rule is too broad.

The Edison Electric Institute (EEI), a trade group that represents all U.S. investor-owned utilities, had urged the SEC to consider a “principles-based, sector-specific, concise ESG reporting framework for financially material climate change information” rather than a broad rule. EEI also cautioned against delegation of public company disclosure requirements to nonprofit organizations or private companies, and it advocated for furnishing the disclosures subject to a safe harbor rather than filing the disclosures.

‘ESG Considerations’ Financially Material

According to ACORE, however, defining what qualifies as “sustainable” should remain important criteria for investment. “U.S. renewable energy sector has attracted over $425 billion in investment over the last decade. Debt and equity providers continue to show strong confidence in the renewable energy sector even as financing mechanisms have evolved to meet the capital requirements of renewable energy projects,” the group noted earlier this year in its comments to the SEC proposal. “Renewable energy investment is thus a key demonstration of companies’ commitments to benefit from climate opportunities.”

The group has argued that ESG investing is “a generally accepted investment theory, with a proven track record of financial success.” Responding to the Trump-era rules, ACORE emphasized that ESG investment principles “are detailed, substantive and pecuniary in nature.” It warned that the Trump rules could have “the effect of chilling or reducing ESG investment” and “would harm America’s global competitiveness by allowing foreign investors to earn comparatively higher returns.”

The new DOL rule removing barriers to investment reopens opportunities for the clean energy sector, it said. “Heading into Thanksgiving, we are very thankful to see a formal reversal of these misguided policies that were holdovers from the Trump administration,” Wetstone said. “As this new Labor Department rule makes clear, ESG considerations are financially material, which is why sustainability investments are often recognized as the best choice for realizing maximum long-term returns.”

Sonal Patel is a POWER senior associate editor (@sonalcpatel@POWERmagazine).