Biden Administration Might Accelerate Growth of ESG Investing

A wave of key leadership changes is expected to drive regulatory shifts in environmental, social and governance strategies.

The Senate runoff elections held in Georgia earlier this month solidified Democratic control of the presidency and Congress. Now, some retirement plan investors are hoping that political control will lead to new guidance on environmental, social and governance (ESG) investing.

Aron Szapiro, head of policy research at Morningstar, says he doesn’t anticipate a swift rollback of the Department of Labor (DOL)’s final ESG rule, which went into effect January 12. That final rule emphasized the importance of using only “pecuniary” factors in the assessment of investment options within tax-qualified retirement plans, rather than expressly limiting the use of environmental, social and governance themed investments, as an earlier version of the rule proposed.

Instead, Szapiro expects a Democratic majority in the Senate will ease the process of confirming political appointees who support ESG investing, including the future chair of the Securities and Exchange Commission (SEC), a position President-elect Joe Biden recently nominated Gary Gensler to fill.

“If they appoint someone who shares the same views as the two Democratic commissioners who are there, we’re going to start to see a serious effort to have enhanced disclosure,” Szapiro says. The upcoming announcement of who will head of the Employee Benefits Security Administration (EBSA) will also likely indicate whether further ESG guidance is ahead, he says.

Szapiro anticipates that there will be new issuer disclosures—or a push to require companies to disclose their risks related to ESG issues—rather than a rollback for now. He says the administration might focus on drawing new guidance or clarification on the rule, including a field assistance bulletin or a FAQ on pecuniary and non-pecuniary matters.

“There will be a fair amount of interest in beginning to mandate new issuer disclosures, and I think that’s where it’ll start,” he says. “That may start with guidance or some recommendations, but that will be a big project. It won’t happen overnight.”

More specifically, Szapiro says he believes the new administration will issue regulatory guidance on the use of ESG investments in qualified default investment alternatives (QDIAs). The final rule does not prohibit ESG funds in a QDIA, stating again that plan fiduciaries must select a fund based only on pecuniary factors. However, the rule does add that a fund is not an appropriate QDIA if it is stated objectives include non-pecuniary factors—for example addressing climate change itself, rather than addressing climate change’s impact on the financial outcomes of investors.

Because this portion of the rule does not go into effect until 2022, many retirement plan experts expect there will be additional guidance to ease confusion in the industry.

The new secretary of labor—a position Biden recently nominated Boston Mayor Marty Walsh for—is also likely to support ESG investing. Walsh has supported initiatives on ESG investing for the city of Boston, and he committed an additional $50 million to such investments in December. The commitment brought Boston’s total investment in the city’s ESG Investment Initiative to $200 million.

Other leaders are also expected to have favorable views on sustainability. Ed Farrington, executive vice president, institutional and retirement business, for Natixis Investment Managers, says he foresees Senator Patty Murray, D-Washington, who currently serves as ranking member for the Health, Education, Labor and Pensions (HELP) Committee, to take over as chair of the committee. 

“You can imagine if you change the leadership of that committee, and therefore what issues will be brought to that debate, you can assume that Senator Murray will be more likely to be supportive of ESG investing going forward,” Farrington notes. Combined with leadership changes in the Senate, DOL, SEC and EBSA, Farrington foresees major changes for access to ESG investing in retirement plans.

Szapiro expects a similar result, adding that by 2022, the retirement industry could see a revamped rule altogether.

“The Biden administration will start to undo the DOL’s ESG rule,” he says. “The first half of the year will be clarifying guidance, and then it wouldn’t surprise me if by 2022 we have a new rule.”