The U.S. Department of Labor (DOL) has requested public comments on protecting workers' retirement savings from climate-related financial risks while the department works to finalize a rule on environmental, social and governance (ESG) investments in employer-sponsored retirement plans.
On Feb. 14, the DOL published in the Federal Register Request for Information on Possible Agency Actions to Protect Life Savings and Pensions from Threats of Climate-Related Financial Risk. The request for information (RFI) asks for public comments on what actions, if any, the department should take under federal law to protect retirement savings and pensions from risks associated with changes in climate.
The RFI poses specific questions related to data collection and fiduciary issues under the Employee Retirement Income Security Act (ERISA).
"The public and stakeholders in general are a valuable source of information for us," said Ali Khawar, acting assistant secretary for employee benefits security, in a statement. "They can help us identify and explore actions to take to better protect the hard-earned retirement savings of America's families."
The RFI follows the DOL's proposed rule on ESG investments that was published in October and is expected to be finalized shortly. The RFI "deals with a broader set of questions than the proposed rule and is a different initiative," the DOL said.
The RFI's 90-day comment period runs through May 15.
DOL's 'Persistent Focus'
"This action affirms a persistent focus of the DOL on the intersection of ESG and retirement savings," commented Elizabeth Goldberg, a partner in the Pittsburgh office of law firm Morgan Lewis, and Rachel Mann, an associate in the firm's Philadelphia office. "The agency's focus on climate change's impact on retirement security is likely to continue even after the agency publishes its final ESG rule."
They added, "the DOL may seek to use this information to shape its interpretation of ERISA's fiduciary duties and the extent to which nonfinancial factors, such as environmental factors, may be considered as part of an ERISA fiduciary's investment decisions."
Among the questions posed to the public by the DOL's Employee Benefits Security Administration (EBSA) are the following:
- Should the EBSA collect data on climate-related financial risks for plans? If so, what information could or should the EBSA collect, what are the potential sources of such information, and how should the EBSA collect it?
- Should the EBSA add questions to the Form 5500 to collect data on climate-related financial risks to retirement plans and their service providers?
- Should administrators of ERISA plans be required to publicly report, in a form that is more easily accessible to the public and more timely than the Form 5500, on the steps they take to manage climate-related financial risks and the results and outcomes of any such steps taken?
- What are the best sources of information for plan fiduciaries to utilize in evaluating climate-related risks with respect to plan investments?
- Do any guaranteed lifetime income products (e.g., annuities) help individuals efficiently mitigate the effects of at least some climate-related financial risks? If so, what mitigation measures do these products take?
Climate Change Risks and 401(k)s
There has been robust debate over the extent to which issues such as corporate greenhouse-gas emissions or carbon neutrality pledges should be considered by fiduciaries when choosing plan investments.
Under the Biden administration, the DOL has taken the position that ESG factors, and climate change issues in particular, pose financial risks that plan sponsors should consider as prudent fiduciaries. The DOL's proposed rule, Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, could require fiduciaries to consider the economic effects of climate change and other ESG factors when evaluating funds for retirement plans, some analysts believe.
A section of the proposal refers to considering "the projected return of the portfolio relative to the funding objectives of the plan, which may often require an evaluation of the economic effects of climate change and other environmental, social, or governance factors on the particular investment ...."
When the rule was proposed, Khawar said that "a principal idea underlying the proposal is that climate change and other ESG factors can be financially material, and, when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America's workers."
Support for Considering Climate Risks
In support of the proposed ESG investing rule, a comment letter signed by the attorneys general of 11 states and the District of Columbia stated that "in one analysis regarding physical risks from climate change, nearly 60 percent of the companies in the S&P 500 have assets with a high risk of exposure to extreme weather events resulting from climate change."
The shareholder advocacy group As You Sow has criticized what it calls "fossil-filled 401(k) plans." In a February press release, the group charged that "company retirement plans are out of alignment with corporate climate goals, forcing employees to invest in oil, coal and deforestation."
Mark Brnovich, attorney general of Arizona, criticized attempts by ESG advocates to limit investments in oil and gas companies. "While climate activists believe they know best, the U.S. can't maintain its security while depending on foreign dictators and oligarchs to supply its energy," he wrote in a March Wall Street Journal opinion column.
Others have raised concerns about the cost and performance of ESG investments. In response to a related Securities and Exchange Commission request for public input on climate change disclosures by public companies, Jean-Pierre Aubry, assistant director of research at the Center for Retirement Research (CRR) at Boston College, wrote in a 2021 comment letter: "My main worry with ESG disclosures is that they would give credence to the army of asset managers currently promoting ESG investing to retail and institutional investors as a way to 'make money by doing good.' "
Aubry added, "Recent ESG research by the CRR finds that the major state and local government pension plans that have incorporated ESG factors into their investment policies underperformed those that did not. The study also finds that most retail ESG funds have higher fees and worse performance than similar index funds."