U.S. ESG Regulatory Update

While the European Union leads the way in ESG regulation, the relevant regulatory bodies of the United States are proposing their own policies and policy amendments for investors.

Currently, there are two outstanding bills making their way through Congress: amendments to the Investment Advisers Act of 1940 and the Employee Retirement Income Security Act of 1974. Both amendments look to require asset managers to consider sustainability and ESG factors at the forefront of their investment decision-making process. Recently, Congress has signaled its support of the financial materiality of ESG factors and that ESG regulation and active ownership are needed to advance the economy towards sustainability.

The Sustainable Investment Policies Act of 2020 proposes an amendment to the Investment Advisers Act of 1940. This amendment would require “large investment advisors to adopt and implement policies to consider Environmental, Social, and Governance (ESG) factors when making investments.” An investment advisor would be required to:

1. File a Sustainable Investment Policy with the SEC, validating their commitment to establish a culture of making investment decisions based on ESG factors, and
2. Commit to an annual evaluation of the policy through a contracted auditor.

As times change and regulations evolve, the investment advisor must be ready to amend their Sustainable Investment Policy to pass auditor scrutiny. Investors are also likely to be interested in the approach of asset managers as they implement their sustainable investment policies.

If the second bill is passed to amend the Employee Retirement Income Security Act of 1974 (ERISA), a new section will be added: the Retirees Sustainable Investment Policies Act of 2020. This amendment would “require retirement and welfare benefit plans that are covered by ERISA to adopt and implement policies in consideration of ESG factors when making investment decisions.” This Act establishes the connection between a plan’s fiduciary duty of prudence and the long-term sustainability of the investments held.

Both bills highlight the rising importance of ESG factors in the day-to-day decision-making for asset managers of all sizes. The passage of these bills would signal the beginning of a cultural shift in investment decision making as well as mandate more immediate and tactical changes to processes and policies. As the U.S. charges ahead towards a more sustainable economy, these amendments represent the important regulatory foundations that will shape the future of asset management and confront the global sustainability challenges that we all face.