ICSWG-US Responds to Labor Department Climate Change RFI

ATLANTA & BOSTON & CHICAGO & CINCINNATI & NEW YORK & SAN FRANCISCO & ST. LOUIS–(BUSINESS WIRE)–The Investment Consultants Sustainability Working Group – United States of America (“ICSWG-US”) announced today that it has sent a letter in response to a Request for Information from the Department of Labor (“DOL”) regarding Possible Agency Actions to Protect Savings and Pensions The Soul of the Threat of Climate-Related Financial Risk (“RFI”) on May 16, 2022. The full response can be found at: www.ICSWG-US.org. Below are highlights from the ICSWG-US response.

As a backdrop, ICSWG-US is a collaboration between 17 investment consulting firms, representing more than $33 trillion in assets under consulting. Founded in 2021 to engage with collective stakeholders and empower asset owners and their key beneficiaries to advance sustainable investment practices across the investment industry. Our market position gives us a unique perspective because of our ongoing interactions with plan sponsors and asset managers, as we work collaboratively to evaluate the impact of climate-related financial risks on pension plan investments and how those risks can be evaluated and mitigated.

With climate-related risks from both physical and transitional risks increasing, there is a clear need for increased access to information, standardization and transparency. The financial materiality and magnitude of physical risk or climate transition will vary by asset class, by sector and industry within the asset class, and even by individual companies and physical assets. Importantly, as the economy transitions, respect for fundamental labor principles and rights is critical to the success of a broad economic transition and can directly affect members of the ERISA pension plan.

For investors to assess climate-related financial risk, they require company disclosures including regarding scope 1, scope 2, and scope 3 carbon emissions; governance practices; strategies to address climate-related financial risks; and risk management practices. We believe that these disclosures may fall outside the scope of the Employee Benefits Security Administration (EBSA) authorities under the Employee Retirement Income Security Act (ERISA) and the Federal Employee Retirement System Act (FERSA). However, a proposed Securities and Exchange Commission (SEC) rule, “Improving and Standardizing Climate-Related Disclosures for Investors,” would require this disclosure for public companies. If disclosure is adopted by a public company, it can help fiduciaries, such as investment asset managers in ERISA and FESA plans, to assess climate-related financial risks on behalf of members and beneficiaries of ERISA plans. Disclosure of climate-related financial risks directly to individual members and beneficiaries of ERISA and fersa must be consistent with other financial risk communications. Based on the EBSA’s mission to develop effective regulations that assist and educate workers, plan sponsors, fiduciaries, and service providers and to vigorously enforce the law, we believe EBSA should coordinate with the SEC to inform and protect investors from any form of misleading statements about a compliance manager. investment against their own investment policies.

The EBSA may not collect data from plan sponsors, such as through Form 5500, on climate-related financial risks for current plans. Until disclosure standards are in place, or standard frameworks and data sources, it will be difficult, if not impossible, to get plan sponsors to report on climate-related financial risks. ERISA plan sponsors face a variety of market and economic risks in overseeing retirement assets. It is not clear to us why one potential risk (climate risk) requires special treatment in this regard. In addition, we believe that this kind of reporting requirement may burden ERISA plans, especially for smaller, less resourced plans. This requirement can also expose the ERISA plan to litigation risk.

Education of participants about all financial risks, including but not limited to climate-related financial risks, is critical to the success of individual investment decision making, especially for those who are responsible for making their own investment decisions in participant-directed individual account plans. The EBSA should continue to promote clear disclosure, as it has done with the Principle Risk disclosures, which cover reasonably predictable financial risks faced by participants, based on investment policies or the objectives of the investment strategy. Thus, we do not believe it is the role of the EBSA to focus narrowly on one discrete financial risk over another. The EBSA can support the IRS and individual states by providing a consistent and reliable source of education at low/no extra cost that is passed on to the underlying investor. Having a third party providing education, as opposed to an investment manager, can also help reduce conflicts of interest.

About ICSWG-US (www.ICSWG-US.org; Contact: info@icswg-us.org)

The Investment Consulting Sustainability Working Group – United States (ICSWG-US) is a collaboration among investment consulting firms to engage with collective stakeholders and empower asset owners and their key beneficiaries to advance sustainable investment practices across the investment industry. ICSWG-US aims to support sustainable investment practices across institutional asset owners and asset managers. Through this effort, ICSWG-US members seek to provide perspectives from the consulting community and become a resource for activities such as standardization of environmental, social and governance integration (“ESG”) and climate-related reporting, regulation, and innovation.

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