Pensions + ESG: Giving Pension Plans Flexibility to Factor ESG into Investment Decisions

As noted previously, on October 14, 2021, the Biden administration released A Roadmap to Build a Climate-Resilient Economy (Roadmap) that expands upon Executive Order 14030: Climate-Related Financial Risk. The Roadmap lays out a strategy to account for and mitigate climate-related risk across the US economy, including for safeguarding pensions and personal savings.

Thrift Savings Plan

The Roadmap emphasizes the criticality of environmental, social, and governance (ESG) considerations for federal government-related pension and retirement plans and positions the Thrift Savings Plan (TSP) to take the lead. Currently, the exposure to climate-related risk to the TSP’s assets is not well-understood, and the Federal Employees’ Retirement System Act (FERSA) limits the TSP’s ability to consider ESG factors in investment decisions. The Department of Labor (DOL) is working with the Federal Retirement Thrift Investment Board and other stakeholders to understand how the TSP has historically taken ESG and other climate-related factors into account. The DOL is also working to understand what actions can be taken under FERSA and other laws to safeguard pension investments with an RFI to supplement its internal legal analysis. Their findings will be made available to President Biden in November.

Private Retirement Plans

The regulatory framework as it stands is often perceived as not providing pension plan managers enough flexibility to consider ESG factors when making investment decisions. As part of DOL’s broader efforts to allow fiduciaries to consider ESG factors in their investments, the Employee Benefits Security Administration proposed a rule on October 13, 2021, that helps enable fund managers to include vulnerabilities to climate risk when evaluating an investment and when voting on shareholder resolutions and board nominations. The proposed rule is in line with steps taken by the UK, the European Union, and Japan to incorporate ESG factors in retirement plan management. Members of the public may comment on the proposed rule until December 13, 2021.

Although the Roadmap does not specifically contemplate regulatory changes, as more fund managers incorporate ESG factors into their investment decisions, these funds should ensure they are implementing climate risk into their risk management frameworks and consider controls to ensure appropriate ESG and climate risk reporting and disclosures.