The regulatory environment for sustainable investment will “improve markedly” under the incoming Biden Administration, writes Jon Hale, head of sustainability research for the Americas at Morningstar, and Aron Szapiro, its head of policy research, in a recent blog.
The two Morningstar researchers expect the Biden Administration will work to reverse or clarify the Department of Labor’s new rule that was intended to limit the use of environmental, social and governance-focused investments in 401(k) plans and revisit the Securities and Exchange Commission rule that limits proxy voting proposals from all investors.
The DOL rule was adopted in late October but was modified slightly following strong opposition from asset managers, pension funds, socially responsible investing advocates and Democratic members of Congress.
It no longer singles out ESG investments but rather requires plan fiduciaries to select investments based only on pecuniary factors — monetary factors that are expected to have a material effect on risk and/or return of an investment.
(Related: Labor Finalizes Controversial ESG Rule)
In the case of a tie between between two different investment alternatives based on pecuniary factors alone, the fiduciary may use non-pecuniary factors, presumably including ESG, but only if they provide documentation about the reasons behind such a selection and why it is in the interests of plan participants.
The Morningstar researchers expect a Labor Department under President Biden will provide guidance about the new DOL rule that “makes clear that material ESG factors are pecuniary and can be considered by plan fiduciaries as part of the fiduciary duty.”
They also expect a Biden DOL will draft new rules to allow ESG funds as default options in 401(k) plans, which the most recent DOL rule disallows.
Another agency rule that Hale and Szapiro anticipate will change under a Biden presidency is the new SEC rule that raises the thresholds for shareholders to file resolutions at company annual meetings, and refile them later on if they don’t succeed.
(Related: SEC Votes to Restrict Shareholder Proposals)
The rule, which takes the form of amendments to Section 14A-8 of the Securities and Exchange Act of 1934, requires, for example, that a shareholder own at least $2,000 worth of stock for three years to sponsor a first-time proxy proposal, up from one year currently, and that a resubmission of a proposal within the next five years require a minimum 5% vote initially.
The SEC passed the rule in late September 3:2, with its two Democratic-appointed commissioners opposed. An SEC under Biden likely will have a Democratic majority that could quash or amend the rule.
A Democratic-led SEC also could draft rules requiring public companies to disclose climate-related financial risks as well as greenhouse gas emissions in their operations and supply chains, according to Hale and Szapiro.
The agency’s own Investor Advisory Committee recommended this approach during the current Trump Administration as a way to provide investors with material information that could affect their investment decisions and which currently is often provided by third parties that may not be correct.
If a Biden Administration does make these changes, they “will not only shift the regulatory environment to be more favorable toward sustainable investing, [but] mandatory disclosure of climate and other material social and environmental risks will also help all investors make better-informed decisions,” write Hale and Szapiro.
Days after the Morningstar researchers published their blog, Biden appointed former Secretary of State John Kerry as his special presidential envoy for climate, creating a new cabinet position. In his statement that followed the announcement, Kerry said, the Biden White House intends to deal with “the climate crisis as the urgent national security threat that it is.”
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