Energy Investment and the ERISA ESG Spigot

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Historically, pension fund assets have been one of the most important sources of investment in fossil fuels. However, pension funds are increasingly interested in sustainability and environmental, social and governance (ESG) considerations in investments. Sustainability is seen as a key indicator of long-term value creation and ESG factors important to a business are seen as an essential part of sustainability.

As climate concerns grow, investments in fossil fuel companies have been affected. Public pensions that take ESG and climate concerns into account in investment decisions have, in some cases, abandoned investments in fossil fuels, taking into account the energy transition and considerations of risk and return.

Recently, Maine became the first state to enact a law requiring the $ 17 billion public employee pension fund to divest itself of any fossil fuel portfolio by 2026. The New State Pension Fund York has also indicated it will divest itself of some high-risk fossil fuel companies. over the next five years.

The three largest U.S. public pension funds ($ 458.9 billion from the California Public Employee Pension System; the $ 299.8 billion California State Teachers Pension System and the $ 299.8 billion California State Pension Fund New York State Joint Venture of $ 254.8 billion) recently supported the replacement of several directors of Exxon Mobil Corp. promote the energy transition and take into account the risks of climate change in its business plan.

Texas, however, which has one of the largest public pension funds in the United States, recently passed a law prohibiting Texas public pensions from investing in companies that have disengaged from fossil fuels or that had to disengage from fossil fuels. ‘other restrictions on the oil and gas industry.

ERISA and ESG

On the other hand, private pension plans, which are governed by the Employees Retirement Income Security Act 1974 (ERISA), have been subject to divergent political views in statements by previous administrations regarding ESG factors. in investments.

Under the previous administration, the rule of financial factors in the selection of plan investments became final and required that trustees of private pension plans subject to ERISA only consider financial factors in making decisions about investment and not non-monetary factors, which could include ESG factors.

To meet ERISA’s fiduciary obligations and responsibilities, the guidelines provided that plan trustees were not allowed to subordinate economic interests to political objectives such as ESG when making investment decisions.

In addition, the US Department of Labor began investigating investments in private pension plans as part of the previous administration’s policy. Executive decree promoting energy infrastructure and economic growth, which aimed to remove ESG considerations from the investment decision-making process that may lead fiduciaries to invest in renewables instead of coal, oil and natural gas.

The current administration has taken the opposite approach and appears to be embracing ESG factors, including climate-related risks. On the first day of his term, President Biden published Executive decree protecting public health and the environment and restoring science to face the climate crisis, which ordered all departments and executive agencies to review actions taken by the previous administration that conflict with national priorities and take action to bring them into line with the ordinance. The attached fact sheet specifically states that the rule of financial factors in selecting plan investments should be considered.

The DOL has issued a statement that it will not apply the final rule on financial factors in selecting plan investments or pursue enforcement action against any plan trustees for failure to comply with this final rule. This rule, however, is still in effect.

On May 5, Biden published a Executive Decree on Climate-Related Financial Risk which included a section on the resilience of life savings and pensions. In accordance with this ordinance, the DOL was tasked with identifying measures that could be taken under ERISA to protect the life savings and pensions of American workers and families against threats of climate-related financial risk. .

The ordinance also called for the DOL to consider issuing, by September 20, a proposed rule for notice and comment, to suspend, revise or rescind the rule of financial factors in the selection of the plan’s investments. The DOL was further tasked with reviewing, in accordance with ERISA, how the Federal Retirement Thrift Investment Board considered ESG factors, including climate-related financial risk factors, when making investment decisions.

Action on federal legislation

While we await further guidance from the DOL, additional bills have been introduced in the House (HR 3387) and the Senate (S.1762) to modify the ERISA, entitled the Act respecting financial factors in the choice of pension plan investments. These bills would repeal the previous administration’s rule on financial factors in selecting plan investments. In addition, this would allow plan trustees to take ESG or similar factors into account in their investment decisions, provided that consideration of such factors is consistent with their fiduciary obligations under ERISA.

It would also allow ESG factors to be considered as determinants when considering competing investments that provide similar economic results without requiring further documentation of this decision-making process. In addition, under the proposed law, investments including ESG factors could be a default investment or a component of a default investment under an ERISA plan.

In order to provide investors with ESG information on a company, the Chamber recently adopted the Law on the improvement of corporate governance and investor protection (HR 1187). The law, if enacted, would require SOEs to disclose their ESG metrics in their financial statements against their long-term business plans.

What’s at stake

It is reported that at the end of the first quarter of 2020, the total assets of US pension plans stood at $ 28 trillion. With access to additional investments from private pension funds at stake for energy companies, future guidance on ESG factors in ERISA pension plan investments will be important for the energy sector.

As the demand for ESG-focused investments continues to grow, the need for more detailed ESG and sustainability information and a framework for investors is clear. Whether it is the House Bill, HR 3387, or the Senate Bill, S. 1762, will be passed is unknown. However, the DOL was asked to consider issuing, by September, for opinion and comments, a proposed rule to suspend, revise or revoke the previous administration’s rule on financial factors in the selection of the investments of the DOL. diet.

However, such new DOL guidelines should always conform to ERISA requirements.

This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.

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Author Info

Candace L. Quinn is Senior Counsel in the Benefits Department of the New York office of Seyfarth Shaw LLP. She is an executive compensation and benefits lawyer with significant international and national experience and LLMs in energy and taxation.

Linda J. Haynes is a partner in the Employee Benefits Department of the Chicago office of Seyfarth Shaw LLP. She advises clients on complex and evolving ERISA fiduciary matters that affect plan trustees.

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