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.