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Is a Backlash Against ESG Investing Taking Shape?


April 7, 2022

A proposal from the conservative American Legislative Exchange Council to block state pension funds from selecting investments based on environmental, social and governance factors is being closely watched by benefits attorneys who say it echoes Trump-era regulations that evinced antipathy toward ESG investing.

The model policy, unveiled Wednesday, could give state legislatures a template for implementing similar restrictions on ESG investments that were proposed under the Trump administration in late 2020, though ALEC envisions restricting state-run retirement plans instead of employer sponsored ones. President Joe Biden’s Department of Labor has since backed off those rules.

The proposal’s main focus, and a major idea behind the Trump-era DOL rule, has to do with requiring fiduciaries of a retirement plan to explain why they’re choosing ESG-based investments over other comparable options.

In particular, the proposal would restrict investment by specifying that an option’s performance — not its environmental or social impact — should be the focus when a retirement plan manager is deciding whether it is right for a plan. That was the same process suggested by the Trump-era DOL.

And the ALEC proposal would go even further than Trump’s rule by, for example, expanding the definition of what constitutes a material financial risk to exclude uncertain events far in the future — which might include climate change.

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“To the extent this debate provides any guidance into the best thinking about the pecuniary benefits provided by ESG-type investments, I think, could have some tag-along effects about providing or dissuading fiduciaries from using those types of investments in plans,” said Daniel Sutter, an attorney at Cohen Milstein Sellers & Toll LLP.

“It may just reveal the best thinking on the ESG investment thesis and whether or not, you know, the individuals that spend a lot of their time studying the economic benefits of ESG, whether there’s a strong case that there’s a long-term pecuniary benefit,” he added.

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