April 25, 2023


Asia must catch up on ESG investing (NIGEL GREEN, APRIL 25, 2023, Asia Times)

The bill cleared the US Congress, when the Senate voted 50-46 to adopt a measure to overturn a Labor Department rule making it easier for fund managers to consider environmental, social and corporate governance (ESG) factors for investments and shareholder rights decisions.

Meanwhile, financial firms in the UK and the European Union have "remained under significant pressure" to comply with ESG rules over the past six months, KPMG's Regulatory Barometer recently revealed.

While there remain difficulties in the US in establishing ESG regulations versus the progress made in Europe, the two global regions are both heading toward greater standardization.

The regulatory push in the area of ESG is being driven by soaring demand by institutional and retail investors. 

ESG investments have become increasingly popular in the past decade as investors look for ways to generate decent returns while supporting companies that prioritize sustainable practices and social responsibility.

However, Asia, on almost all counts, lags behind the rest of the world in terms of demand for ESG investing.

In order to catch up, there's a pressing need to stoke demand with greater, wider awareness about ESG investments and their importance in creating a sustainable future. 

ESG Investing After the DOL Rule on "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights" [Max M. Schanzenbach (Northwestern Pritzker School of Law), and Robert H. Sitkoff (Harvard Law School), on Thursday, February 2, 2023, Harvard Law School Forum on Corporate Governance]

In late 2022, the Department of Labor under President Biden promulgated a new rule on "Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights," superseding the Department's 2020 rule promulgated under President Trump. Numerous media reports suggested that the 2022 Biden Rule permits or even encourages ESG investing, in contrast to the 2020 Trump Rule, which was reported to be hostile to ESG investing. These reports are wrong. This summary aims clarify the effect of the Biden Rule and what has changed from the Trump Rule.

In brief, the 2022 Biden Rule largely reaffirms the Department of Labor's longstanding position, compelled by binding Supreme Court precedent, that an ERISA fiduciary may use ESG investing to improve risk-adjusted returns but not to obtain collateral benefits. Subject to a few nuanced changes of limited practical import, the Biden Rule is largely consistent with the 2020 Trump Rule and earlier regulatory guidance.

Much of the confusion that the 2022 Biden Rule endorses ESG investing, and that the 2020 Trump Rule opposed it, traces to the original proposals for those rules. The Biden Proposal favored ESG factors by deeming them "often" required by fiduciary duty. The Trump Proposal disfavored ESG factors by subjecting them to enhanced fiduciary scrutiny. However, following the notice-and-comment period, the Department significantly revised those proposals before finalization. Neither final rule singled out ESG investing for favored or disfavored treatment. The final Trump Rule did not use the term "ESG." The regulatory text of the final Biden Rule refers once to ESG investing, but only to state that ESG factors "may" be "relevant to a risk and return analysis," depending "on the individual facts and circumstances." This statement is true for all investment factors, ESG or otherwise.

The heart of the 2022 Biden Rule is the requirement that an ERISA fiduciary must make investment decisions "based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis." The heart of the 2020 Trump Rule was the requirement that an ERISA fiduciary must make investment decisions "based only on pecuniary factors." But a pecuniary factor was defined by the Trump Rule to mean one "that a fiduciary prudently determines is expected to have a material effect on the risk and/or return of an investment." The changes in the Biden Rule from the Trump Rule are thus cosmetic: changing the terms "prudently" to "reasonably," and "material" to "relevant." In practical terms, the Biden Rule replaced the Trump Rule's use of the term "pecuniary factors" with its definition provided in the Trump rule. Crucially, both the Biden Rule and the Trump Rule specify that a "fiduciary may not subordinate the interests of the participants and beneficiaries in their retirement income or financial benefits under the plan to other objectives, and may not sacrifice investment return or take on additional investment risk to promote [other] benefits or goals."

Posted by at April 25, 2023 12:00 AM