Beware the “ESGs of March” as ESG Regulatory Change Is Afoot

Three recent developments in relation to ESG related disclosures are of note: (1) on March 10th, the US Department of Labor announced it would not enforce its own rules related to ESG investing, (2) on the same day the EU’s mandatory sustainability risk disclosure went into effect, and (3) the SEC announced an enforcement task force to hunt down ESG related misconduct on March 4th.

The DOL Signals A Possible Reversal

The DOL issued an enforcement policy statement to the effect that it would not enforce its own rules on ESG investing, because the ESG rules might not be well grounded in climate science. This may be the first step in negating the November 2020 adoption by the DOL of rule amendments that was not particularly ESG friendly. However, the text of the final rule is not a per se prohibition on ESG investing: rather the DOL currently allows use of non-pecuniary factors as a “tie-breaker” only when the plan fiduciary is not able to distinguish between investment alternatives on the basis of pecuniary factors alone and only if the fiduciary’s determination is well documented. The DOL’s November 2020 rulemaking is now simply not being enforced.

The SEC Signals ESG as an Enforcement Priority

The launch by the SEC of an enforcement task force to hunt down ESG misconduct immediately preceded the DOL’s ESG enforcement holiday (described above). The SEC mission, however, appears aimed at “green washing”.

EU ESAs Announce SFDR Implementation Time Line

Meanwhile in Europe, sustainability investment disclosure is now mandatory for all funds marketed in the EU, where the burden is to explain why ESG factors are not being implemented. The EU European Supervisory Authorities (ESAs) issued a joint statement on February 25, 2021 on the implementation timeline of the EU regulation on sustainability disclosure in the financial services sector or “SFDR” addressing the timeline from the disclosure implementation date of March 10, 2021 through the adoption of Regulatory Technical Standards, projected for year-end 2021, and the commencement of mandatory reporting on sustainability factors thereafter.

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