DOL Pushing Through ESG Fund Rule at ‘Warp Speed:’ Reports

October 22, 2020

President Donald Trump’s administration is speeding through finalizing a rule proposed by the Department of Labor this summer to increase scrutiny of retirement plans selecting environmental, social and governance-focused funds, but any rule change is likely to be met with legal challenges or be overturned, according to news reports.

In June, the DOL submitted a proposal that would require retirement plans to demonstrate that their chosen ESG funds are “economically indistinguishable” from other investments. Plans that opt for ESG funds with higher fees, lower returns or greater risk would violate the protections established by the Employee Retirement Income Security Act of 1974, senior DOL officials said in the proposal. Last week, the Employee Benefits Security Administration submitted the rule change to the White House, Bloomberg reports.

Critics of the rule have said the new rule would trigger unintended consequences, incur extra costs for beneficiaries, sow confusion among fiduciaries and set up a double standard putting ESG funds under more scrutiny than non-ESG alternatives. By the end of July, the DOL’s website showed that it had received 1,503 comments, but they were not made public.

As of last week, more than 130 fund management and financial advice firms have submitted comments slamming the rule, Bloomberg writes. 

“In a normal process, such overwhelming opposition would send regulators back to the drawing board,” says Jon Hale, director of ESG research for the Americas at Chicago-based Morningstar, according to the news service. Hale says the Trump administration is trying to finalize the change before losing the presidency, Bloomberg writes.

The White House is in fact moving at "warp speed” on the rule, says Bryan McGannon, director of policy and programs at US SIF, a Washington-based group that supports sustainable investment businesses, according to the news service.

“Impactful” rule changes such as the one the DOL proposed in June normally take 18 months to push through, rather than four-and-a-half months, according to McGannon, Bloomberg writes. 

“It’s clear the Labor Department is not taking the public-comment process seriously,” he says, according to the news service.

If the rule change is implemented, however, it would most likely be met with a legal challenge, Bloomberg writes. And if Joe Biden wins this year’s U.S. presidential election, his administration is likely to undo the rule change, according to the news services.

McGannon, meanwhile, says that the Trump administration, in its haste to pass the rule change, could be violating the Administrative Procedure Act, Bloomberg writes. And a Manhattan federal court last month partially overturned another attempt by Labor Secretary Eugene Scalia to speed through certain rule changes on the grounds that it violated the APA, according to the news service.

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By Alex Padalka
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