Biden’s Executive Order on Climate-Related Financial Risk
This week, President Biden issued his first veto after Congress voted to block a Department of Labor (DOL) rule allowing retirement plans to weigh the long-term impacts of social factors and climate change on investments. According to the White House, the legislation, which was voted on by the House of Representatives last month, was vetoed because ‘retirement plan fiduciaries should be able to consider any factor that maximize financial returns’ and ‘ the retirement savings of individuals across the country would put at risk’. While conservative lawmakers and advocacy groups are labeling the Financial Factors in Selecting Plan Investments rules as ‘the ESG Rule’ and decrying it as ‘woke’, we need to understand how we got to this place.
In February 2021, the Harvard Law School on Corporate Governance published ESG and the Biden Presidency (harvard.edu) in which they concluded that ESG was expected to become more prominent on multiple dimensions and US investors should be prepared for a significantly greater focus and prioritization of ESG polices in coming years. In November 2022, the DOL released its rule on ESG investing, entitled “Financial Factors in Selecting Plan Investments”, in which the administration could view the consideration of ESG factors more favorably and enable retirement plans to more assertively factor in ESG criteria.
In May 2021, President Biden issued the Executive Order on Climate-Related Financial Risk directing the Secretary of Labor to “consider suspending, revising, or rescinding any rules from the prior administration that would have barred investment firms from considering environmental, social and governance factors, including climate-related risks, in their investment decisions related to workers’ pensions.” Under the heading, “Bolster the Resilience of Life Savings and Pensions,” the order also asks the Labor Department to report on other measures that can be implemented to protect the life savings and pensions of U.S. workers and families from climate-related financial risk, and to assess how the Federal Retirement Thrift Investment Board has taken environmental, social, and governance factors, including climate-related risk, into account. The order was clearly intended to mute, and likely reverse, two final rules published in 2020 by the Trump administration that gave asset managers free rein to ignore environmental, societal and governance factors and undermine their consideration by ERISA fiduciaries.
We can expect the Biden administration to implement a broad range of policy changes meant to mitigate climate risk and bring the US back into the global sustainability conversation. What we can expect to see from this…
- Rising Calls for ESG Disclosure
- Stricter Climate Regulations
- Changing Operational Backdrops in Various Industries
- Investors Increasingly Pricing ESG Criteria Into Decision-Making