Joshua Lichtenstein Discusses the Role of ESG Factors in Pension Investments with the WSJ

The political divide over the role that environmental, social and governance factors should play in state pension investments could deepen as Republicans gained some ground in the midterm elections and the Labor Department issued a new, pro-ESG rule for retirement plans.

ERISA and benefits partner Joshua Lichtenstein told The Wall Street Journal that, “Republican victories in the midterm elections, including the party’s renewed majority in the House, stand to continue the momentum of the political backlash against ESG-focused investing. If you look at the trend line, we’re seeing what I’d describe as more escalation on the anti-ESG front,” Joshua said. “I think we can expect to see probably more of this activity coming from Republican-led states.”

He added, however, that the new rule issued by the Labor Department last week could make it more difficult for state pensions to ignore ESG factors. The rule allows retirement plans that are covered by the Employee Retirement Income Security Act of 1974, or Erisa, to consider ESG in their investments. ESG issues could present material risk or opportunities to companies, so a prudent fiduciary should consider those issues alongside other economic factors when evaluating investments, according to the rule. It reverses a 2020 Trump Labor rule that largely prevented retirement managers from considering ESG factors.

“The state pension laws are basically all copies of portions of Erisa, and the DOL rule is a regulation on how you’re supposed to interpret the duties of prudence and loyalty under Erisa,” Joshua said. “When you have the Labor Department give its interpretation of that language and it’s more pro-ESG, and then you have other states taking the opposite interpretation of the meaning of the exact same words, you’re creating a conflict.”