Smoke and mirrors in the ESG arena?

I was reading with some interest the latest NAPA retirement industry article on how the Trump administration approached ESG (environmental, social, and governance investing and how the Biden administration approached it. Was there a dramatic difference between the two rules or was it a lot of smoke and mirrors with not that much difference?

The primary difference between Biden's ESG (Environmental, Social, and Governance) rule and Trump's ESG rule lies in how retirement plan fiduciaries are allowed to consider ESG factors when selecting investments for plans governed by the Employee Retirement Income Security Act (ERISA).

Trump Administration's ESG Rule:

• Focus: Emphasized financial performance as the paramount consideration for fiduciaries.
• Restrictions on ESG: Required fiduciaries to prove that ESG factors were financially material (pecuniary) before they could be considered in investment decisions. The rule discouraged the use of ESG considerations unless they had a direct, measurable financial benefit.
• Default Investment Options: Explicitly prohibited ESG considerations in default investment options, such as Qualified Default Investment Alternatives (QDIAs), unless they were clearly financially advantageous.

Biden Administration's ESG Rule:

• Focus: Allows ESG factors to be considered as part of a broader assessment of an investment’s risk-return profile.
• Flexibility: Permits fiduciaries to include ESG considerations as long as they are relevant to evaluating potential investment risks or returns. This rule emphasizes that ESG factors can impact financial outcomes and should not be excluded from consideration.
• Default Investment Options: Removes the explicit prohibition on ESG considerations in default investment options, offering fiduciaries more leeway to include them if deemed appropriate for the plan's financial goals.

Key Philosophical Divide:

• Trump's Rule: Reflects skepticism toward ESG, viewing it as potentially conflicting with fiduciary responsibility unless explicitly tied to financial outcomes.
• Biden's Rule: Views ESG as potentially integral to fiduciary responsibility, acknowledging that environmental, social, and governance issues can materially affect investment performance.

These differing rules reflect broader political debates over the role of ESG in investing and whether considerations beyond short-term financial returns are appropriate for fiduciaries managing retirement plans.

My view as we get ready for Round 3 of this skirmish is that ESG screening is yet a different definition/ view on risk and one that should be considered. It can identify factors that might impact financial return. I see the screens as extra data points that can help in making a prudent decision. I would think plan sponsors would agree.