Wednesday, March 15, 2023

SVB, ESG, and Biden’s ERISA Rule | RealClearEnergy

Under ERISA, retirement savings must be invested for the exclusive purpose of providing retirement benefits. With the rise in fashion for ESG investing and its dubious claim of “doing well by doing good,” the Trump administration decided that the Labor Department needed to clarify application of the law’s intent that the sole objective of pension investing is to do well by seeking to maximize risk-adjusted returns. The result was a 2020 rule that skilfully clarified the legal duties of investment fiduciaries. Far from preventing them from considering ESG among other factors, as the Biden administration subsequently alleged, the 2020 rule doesn’t even mention ESG. Instead, it de-fanged ESG by requiring that fiduciaries consider only pecuniary factors in selecting plan investments. If a factor doesn’t make the cut as pecuniary, it should not be taken into consideration.

This, the Biden administration claimed, had a chilling effect on incorporating ESG, especially climate factors, into investment decisions – as well it should. Most of what constitutes ESG is investment chaff. This represented an obstacle to the administration’s climate-policy ambitions. In May 2021, President Biden signed an executive order to use corporate climate-risk disclosure to help achieve its aim of decarbonizing the economy by 2050. Under White House instruction, in October 2021, the Labor Department rushed out a draft rule that appeared to suggest that fiduciaries should consider climate and other ESG factors in making investment decisions. Together with other provisions, it would have driven a coach and horses through ERISA. For this reason, it stood little chance of surviving inevitable legal challenge. 

The final rule, which the Braun-Barr resolution nullifies – barring a presidential veto –substantially weakens the earlier draft but inevitably retains the climate tilt, stating that investment decisions must be based on factors that fiduciaries reasonably determine are relevant to a risk-and-return analysis that “may include” the economic effects of climate change and other ESG factors. The rule makes 161 mentions of climate or climate change. Prudence and loyalty this isn’t. The rule’s aim is facilitating the use of retiree savings in progressives’ fight against climate change.


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