For the past 18 months the US pensions market has been in a state of flux on the topic of ESG. That is a major problem for ESG and, by implication, the climate crisis being debated now at COP26, because of the sheer size of the US pensions market. Within that market lies many trillions of dollars of capital.

The reason for the flux comes from the changing rules laid down by the US Department of Labor (DOL), which governs the responsibilities of fiduciaries over individual account plans (e.g. 401(k) plans). The period of flux spans two administrations and is a highly politicised issue.

In a nutshell, the DOL issued new rules clarifying that fiduciaries should not consider ESG if it involved any increased risk or reduced investment returns. The tone of the rules was anti-ESG and was enough to unsettle fiduciaries who, understandably, perceived serious risk if they were to select an ESG investment which later underperformed.

Fast forward to today and after much to-ing and fro-ing the DOL has effectively reinstated the position pre-June last year. That position is interesting because of two key features:

  1. A very clear statement of the primacy of economic returns, i.e. that fiduciaries should not subordinate financial returns or take on additional risk in the pursuit of non-financial objectives;
  2. A tie-breaker rule, effectively stating that where two investments are "indistinguishable" from an economic perspective, then (and only then) non-economic factors may act as a tie-breaker.

The tie-breaker approach is an interesting approach to the balance of ESG and fiduciary risk. But its real world effectiveness has to be questioned. Will there really be that many scenarios when fiduciaries deem two investments to be "indistinguishable" from an economic perspective, such that they then use one's better ESG profile as a reason to make the decision? Will the tiebreaker actually ever be used?

The world is facing climate catastrophe. I have frequently argued that, if the world is serious about tackling it, we need to start by taking a serious look at whether fiduciary duties need much more significant reform. To my mind that debate starts with the inclusion in law of a 'duty to the environment', which would require fiduciaries to balance impact on the environment with their other existing duties. This is a much more radical step, overhauling concepts of economic primacy that have underpinned the law, and our economic model, for generations. But radical is what we need.

The DOL position falls miles short of such radicalism. That they have u-turned at all is to be welcomed. But it is a baby step in the context of a marathon.