02 Jul PUBLIC PENSION CORNER, #47: ESG in Retirement Plans: the Next Chapter
NEWS:
I. California Delays Climate Reporting, Again
The California Air Resources Board (CARB) has once again delayed reporting requirements under the state’s highly controversial corporate climate emissions laws, pushing the date back from August to November:
According to CARB, the delayed deadline is aimed at giving companies more time, as the regulator plans to introduce limited changes to the climate reporting regulation, which may delay its final approval.
California’s new climate reporting regulations, SB 253 and SB 261, were signed into law in October 2024. SB 253 requires companies with revenues greater than $1 billion that do business in California to report annually on their direct Scope 1 and 2 emissions, and Scope 3 value chain emissions, including those associated with supply chains, business travel, employee commuting, procurement, waste, and water usage. SB 261 applies to U.S. companies that do business in California and with revenues greater than $500 million to prepare a report disclosing their climate-related financial risk, as well as measures to reduce and adapt to that risk.
The new laws will introduce climate-related reporting requirements for most large companies in the U.S. CARB recently issued a preliminary list of more than 4,000 U.S. companies likely to be required to comply with the new climate reporting laws.
II. Courts Block Kansas, Indiana Proxy Advisor Disclosure Laws
Federal courts have given ISS and Glass Lewis a hat trick, making them three-for-three in their challenges of state laws requiring additional disclosure from proxy advisory services. Last week, Kansas and Indiana joined Texas in having their laws blocked:
A federal judge in Kansas has blocked enforcement of a new state law set to take effect Wednesday that regulates proxy advisory firms, ruling the measure likely violates the First Amendment.
Senate Bill 375 enacts the Proxy Advisory Transparency Act. The bill requires proxy advisers to make certain disclosures when recommending an action against company management.
Two proxy advisers with clients in Kansas — Institutional Shareholder Services Inc. and Glass, Lewis & Co. LLC — filed a motion this week in federal court to prevent Kansas Attorney General Kris Kobach from enforcing the law.
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A federal judge late on Friday granted a preliminary injunction blocking an Indiana law requiring new disclosures from proxy advisers, marking a third legal victory for Institutional Shareholder Services and Glass Lewis against restrictions backed by Republican lawmakers.
The two firms recommend how investors can vote at corporate annual meetings. Republican politicians have long sympathized with business complaints about their views on areas like executive pay. Lately, they also say the firms unduly favored shareholder resolutions focused on environmental, social or governance (ESG) topics like workforce diversity and climate change.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“ESG in Retirement Plans: The Next Chapter”
The ongoing saga of the use of ESG in retirement plans governed by the Employee Retirement Income Security Act (ERISA) added another chapter this week, albeit one that has been eagerly anticipated for some time. On Tuesday, the White House’s Office of Information and Regulatory Affairs acknowledged receipt of the Labor Department’s proposed rule revising these guidelines. Recall that the first Trump administration issued a rule on this matter in 2020, more or less banning ESG’s use, except in cases where it was proven to be material. The Biden administration then immediately rescinded that rule and issued one of its own, allowing ESG. That rule too was rescinded by the second Trump team, which then promised a new, more definitive proposal. That is what Labor’s Employee Benefits Security Administration submitted this week. The new rule, titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” will now be reviewed by relevant sister agencies (the SEC, FTC, etc.) and then formally released to the public for a comment period.
For those of you readers who manage private retirement funds, the relevance here is obvious. Given the composition of this email list, it’s not exactly likely that many of you use ESG strategies in the first place, but if you do, consider yourself forewarned.
As for the rest of you, the public fund managers and other public fiduciaries, this rule is relevant to you as well, for a handful of very important, although less obvious reasons. First, as I noted recently in these pages, ERISA applies only to private plans, while public pension plans are generally governed by state law – and state definitions of fiduciary duty. Nevertheless, states often look to ERISA as a guide for crafting their own laws and regulations. In the case of ERISA’s “functional fiduciary” definition, for example, “the… standard is frequently cited as persuasive authority in state-level fiduciary litigation, which means that if a state AG or a pension beneficiary were to challenge a trustee’s politically motivated investment decision, the ERISA functionality test would likely be the blueprint for the case they would make.” In other words, ERISA may not apply to public pensions directly, but it most certainly applies indirectly, which means that Labor’s new rule will almost certainly have implications for public fiduciaries.
A second reason for public fiduciaries to be aware of and to pay attention to the new ERISA/ESG rule is that there is a very good chance that it will contain some reference or another to proxy advisory services – primarily Institutional Shareholder Services (ISS) and Glass Lewis. The principal authorization for rewriting the rule comes from the administration’s February 2025 Executive Order, “Ensuring Lawful Governance and Implementing the President’s ‘Department of Government Efficiency’ Deregulatory Initiative,” which asked agency heads to review and revise inefficient or detrimental regulations. That notwithstanding, secondary authorization can be found in the December 2025 Executive Order, “Protecting American Investors from Foreign-Owned and Politically-Motivated Proxy Advisors.” That EO instructed Labor/EBSA to “strengthen ERISA fiduciary rules and increase fiduciaries’ transparency regarding their use of proxy advisors, ensuring proxy advisors and plan managers act solely in the financial interest of American workers and retirees.” Again, this is about ERISA, which applies to private plans, but given that the overwhelming majority of pension plans also use ISS and Glass Lewis, any provisions affecting proxy advisors will reverberate in the public sector as well.
A third, and almost entirely overlooked, reason for public fiduciaries to be aware of ERISA-related rulemaking is the aforementioned public comment period. As I also noted above, this issue has bounced back and forth between administrations. After Republicans took back control of Congress in 2022, the House tried repeatedly (and once got the Senate to agree) to rewrite the law to prevent the use of ESG in private pensions, only to be thwarted by their Democratic opponents (including President Biden and his veto pen). If Democrats take control of Congress this fall, one can reasonably expect that they will try to do the same in reverse. Given this, those who believe that the use of ESG strategies violates their legal and moral obligations should consider participating in the public comment process. Support from all fiduciaries – public and private – who believe that their responsibility is to maximize retirement benefits for their beneficiaries would help to create a record of support that would aid in defending the new rule against legal, legislative, and future regulatory challenges.
At some point, the regulatory ping-pong on this issue has to stop. The two best ways to ensure that it stops with this iteration of the rule are for the rule to be written well (which I believe wholeheartedly that it has been) and for it to be supported prodigiously by actual fiduciaries.
The ball is heading for your court, in short (or for your side of the table, to maintain the ping-pong analogy). Be prepared.
