Biden team to review Labor Department ESG rule

The Biden administration will review a recent Department of Labor rule stipulating that ERISA plan fiduciaries cannot invest in "non-pecuniary" vehicles that sacrifice investment returns or take on additional risk.

In his first few hours in office Wednesday, President Joe Biden signed a flurry of executive orders, including one titled "Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis."

In the order, Mr. Biden directed all executive departments and agencies "to immediately review and, as appropriate and consistent with applicable law, take action to address the promulgation of federal regulations and other actions during the last four years that conflict with these important national objectives, and to immediately commence work to confront the climate crisis."

The lone Labor Department rule up for review is its "Financial Factors in Selecting Plan Investments" rule, which was finalized in November and took effect Jan. 12.

While the initial proposal, which was unveiled in June, focused on environmental, social and governance investment factors, the final rule walked back the ESG language.

The final rule requires ERISA plan fiduciaries to select investments based on pecuniary factors, described as any factor that a fiduciary prudently determines is expected to have a material effect on the risk and return based on appropriate investment guidelines.

Bryan McGannon, director of policy and programs at US SIF: The Forum for Sustainable and Responsible Investment, said he was pleased that the Biden administration is reviewing the rule.

"The DOL should issue immediate guidance to clarify that ESG criteria is considered pecuniary and begin to re-write the rule, including allowing sustainable investments to be included in default plans," he said in a statement.

In a separate action Wednesday, Ronald A. Klain, White House chief of staff, issued a memo indicating that all new or pending regulatory initiatives will be paused and reviewed. The move was widely expected and common procedure for incoming administrations.

Mr. Klain also directed agencies not to propose or issue any rules until a Mr. Biden appointee was in office at a given agency.

For rules that have been published in the Federal Register but have not taken effect, Mr. Klain advised postponing the rules' effective dates for 60 days and opening up a 30-day comment period.

The Labor Department finalized a prohibited transaction exemption in December permitting investment-advice fiduciaries to receive compensation for more types of their guidance, including advice to roll over assets from a retirement plan to an individual retirement account. The exemption is slated to go into effect on Feb. 16. Although it wasn't singled out in Mr. Klain's memo, it will likely be subject additional review.