Illustration: Sarah Grillo/Axios

It's hardly the biggest regulatory fight of the Trump era, but there's an important battle raging over plans to restrict sustainable investing that also distills the energy and climate politics of the moment.

Driving the news: The Labor Department is planning to limit private retirement plan managers' leeway to invest based on ESG — environmental, social and governance — factors.

  • The comment period on the draft regulation ended yesterday. It requires administrators to make investments "based solely on pecuniary factors" and limits the ability to fit ESG under that umbrella.

There are a number of factors at play ...

1. It potentially tees up a battle in the next Congress.

  • There's opposition among Democratic lawmakers, including Sen. Elizabeth Warren, who is influential on financial policy, and the chairman of the House Education and Labor Committee.
  • That's important because regulations finalized very late in a presidential administration can be overturned using something called the Congressional Review Act, and resolutions under the act are immune from Senate filibusters.
  • If Democrats control Congress and the White House next year, other energy- and environment-related rules finalized in the waning months of Trump's presidency could face CRA fights.

2. It's the latest example of how Trump administration policies, like bailing on the Paris Agreement, at times go beyond what even some powerful K Street players want.

  • Consider that the powerful American Bankers Association, in new comments, calls the plan "unnecessary," says it's a potential burden, and proposes it be scrapped.
  • Asset management behemoth BlackRock, which recently increased its focus on sustainability, expressed concerns in new comments and urged more Labor-industry discussion, saying it “creates an overly prescriptive and burdensome standard that would interfere with plan fiduciaries’ ability and willingness to consider financially material ESG factors."
  • Meanwhile, the U.S. Chamber of Commerce's comments support the idea of rulemaking on ESG, but warns that the plan as written could have "unintended consequences" and urges a bunch of changes.
  • And, it does have some backing from conservative interests like the Competitive Enterprise Institute, signaling the fault lines between the right's activists and corporate interests on some topics.

3. The Labor Department is not typically seen as a climate policy battleground, but this tussle shows that policies across the government can be climate-related.

  • Comments filed yesterday by the sustainable investment group Ceres calls the plan based on "outdated" thinking about ESG.
  • Ceres argues that considering ESG factors can help avoid risky investment in companies most vulnerable to global warming and policies that transition from fossil fuels.

The intrigue: Getting back to the proposed investing rule, which Axios' Felix Salmon covered here:

  • Labor Secretary Eugene Scalia says there's evidence that "when investments are made to further a particular environmental or social cause, returns unsurprisingly suffer."
  • His WSJ opinion piece promoting the plan argues that it "reminds plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end."

Yes, but: Multiple experts say ESG funds are a good bet! A recent Morningstar analysis found that over half of ESG funds outperformed their conventional peers over the last decade.

What they're saying: Experts with the firm Seyfarth Shaw, writing in Bloomberg Law today, point out...

  • "BlackRock found that more than three-quarters of sustainable indexes did better than traditional indexes in market downturns from 2015–2018."
  • "In addition, several leading investment management companies have found ESG investments outperformed traditional investments in 2020."

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