DOL Seeks Comments on Protecting Retirement Savings from Climate Risks

The U.S. Department of Labor (DOL) has sought public comment on protecting workers’ retirement savings from climate-related financial risks as the department works to finalize a rule on environmental, social and governance (ESG) in employer-sponsored pension plans.

On February 14, the DOL published in the
Federal Register Request for information on possible agency actions to protect life savings and pensions from climate-related financial risk threats. The Request for Information (RFI) is seeking public comment on what steps, if any, the department should take under federal law to protect retirement savings and pensions from the risks associated with climate change.

The RFI asks specific questions related to data collection and fiduciary issues under the Employees Retirement Income Security Act (ERISA).

“The general public and stakeholders are a valuable source of information for us,” Ali Khawar, acting assistant secretary for benefits security, said in a statement. “They can help us identify and explore actions to take to better protect the hard-earned retirement savings of American families.”

The RFI follows the DOL’s proposed rule on ESG investments which was published in October and is expected to be finalized shortly. The RFI “addresses a broader set of issues than the proposed rule and is a different initiative,” the DOL said.

RFI’s 90-day comment period runs until May 15.

Questions asked

Among the questions posed to the public by the DOL’s Employee Benefits Security Administration (EBSA) include the following:

  • Should EBSA collect dataa on climate-related financial risks for schemes? If so, what information could or should EBSA collect, what are the potential sources of this information and how should EBSA collect it?

  • Should EBSA add questions to Form 5500 collect data on climate-related financial risks for pension schemes and their service providers?

  • Should administrators of ERISA plans be held to account publicly, in a form more readily available to the public and faster than Form 5500, on the actions they are taking to manage climate-related financial risks and the results and outcomes of those actions taken?

  • What are the best sources of information plan trustees can use in the assessment of climate-related risks with regard to the investments of the scheme?

  • Do you have guaranteed lifetime income products (for example, annuities) help individuals effectively 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 heated debate about the extent to which issues such as corporate greenhouse gas emissions or carbon neutral commitments should be considered by trustees 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 rule proposed by the DOL,
Prudence and loyalty in the selection of plan investments and the exercise of shareholder rightscould require trustees to consider the economic effects of climate change and other ESG factors when evaluating funds for retirement plans, some analysts say.

A section of the proposal refers to considering “the expected performance of the portfolio against the funding objectives of the plan, which may often require an assessment of the economic effects of climate change and other environmental, social or governance on particular investment….”

When the rule was proposed, Khawar said that “a main idea underlying the proposal is that climate change and other ESG factors can be financially material and, when they are, taking them into account will lead inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of American workers.”

Support for taking climate risks into account

In support of the proposed ESG investment rule, a
comment letter signed by the attorneys general of 11 states and the District of Columbia said that “in an analysis regarding physical risks related to climate change, nearly 60% of S&P 500 companies have assets at high risk of exposure to climate change. extreme weather events resulting from climate change.”

Shareholder advocacy group As You Sow has criticized what it calls “fossil-filled 401(k) plans.” In
February press releasethe group charged that “corporate pension plans are not aligned with corporate climate goals, forcing employees to invest in oil, coal and deforestation.”

Concerns Raised

Others have raised concerns about ESG investing. In response to a related request from the Securities and Exchange Commission
request for public comment on climate change disclosures by public companies, Jean-Pierre Aubry, deputy director of research at the Center for Retirement Research (CRR) at Boston College,
wrote in a 2021 comment letter“My main concern with ESG disclosures is that they would give credence to the army of asset managers who are currently promoting ESG investing to retail and institutional investors as a way to ‘make money’ money doing good’.”

Aubry added: “A recent ESG study conducted by the CRR reveals that major state and local government pension plans that have incorporated ESG factors into their investment policies have underperformed those that have not. . The study also reveals that most retail ESG funds have higher fees and poorer performance. than similar index funds.”