Just days after the final environmental, social, and governance (ESG) rule went into effect, Department of Labor (DOL) leaders and panelists joined together for a webinar on the rule’s primary objectives and its effect on plan sponsors and retirement plan participants.
The webinar, “Climate and 401(k) Plans: The DOL’s New Rule Levels the Field for ESG Registration Confirmation,” hosted by sustainable investing advocacy organization Ceres Accelerator and the Environmental Defense Fund, featured DOL Secretary Martin J. Walsh, who opened the discussion to speak on the rule’s potential impact on sustainability and retirement security. “The rule recognizes the impacts of ESG factors on retirement investments, it reflects what smart and careful investment investors already know and allows plans to take ESG factors into account when appropriate,” said Walsh. “Our priority and our commitment remain to protect and support the retirement security of America’s workers.”
“Our priority and our commitment remain to protect and support the retirement security of America’s workers.”
DOL Secretary Walsh
Assistant Labor Secretary Lisa M. Gomez also joined the webinar and reaffirmed that the rule directly applies to all plans under the Employee Retirement Income Security Act of 1974 (ERISA). “They would apply to not only individual account plans like 401(k) plans, not only participant directed plans where participants are choosing which investments, they would invest their retirement savings in, but all plans, including defined benefit (DB) plans, retirement plans where the sponsor chooses the investment itself—all retirement plans are covered by this,” she confirmed.
Gomez referred to the Trump-era rule on ESG investments, adding that the current ESG rule extends investment opportunities for workers wanting to incorporate sustainability in their retirement savings.
“We’re hopeful that through this rule, workers will have a better shot at greater retirement security through broader investment opportunities, which were discouraged by the last administration’s rule that was stricter with respect to ESG factors,” she added. “We’re just hopeful that this rule means that people won’t have missed opportunities in order to increase their investment performance or be precluded from taking steps that can protect their savings from financial risk.”
Answers to ESG pushback
The webinar was met with questions on recent pushbacks against ESG investment options and its impact on retirement security. Recently, a coalition of 25 states filed a lawsuit against the Department of Labor (DOL), accusing the division of adversely affecting retirement investments and savings for workers. The suit sought to halt the final rule from going into effect on January 30.
The DOL’s final rule on ESG allows plan fiduciaries to incorporate ESG factors into their investment options but does not require them to do so. At the end of the day, it’s up to plan fiduciaries to select the best investments for their plan and participants, whether that means it incorporates sustainable factors or not, said panelist Brandon Rees, deputy director of Corporations and Capital Markets, and who works in the Office of Investment at the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO).
Removing the Trump-era DOL rule gives plan fiduciaries the option to consider ESG factors, but they are not mandated to do so, he added.
“What are relevant ESG factors for investors to consider is going to evolve over time and that’s why removing the [former administration’s] final rule’s prohibition on ESG funds as the default investment alternative for defined contribution [plans] is so important. It eliminates uncertainty that was created by the previous administration’s prohibition of these ESG funds without actually defining them,” Rees continued. “We believe that the best investment for default qualified default investment alternative [QDIA] is to be the best fund that’s selected, regardless of how or whether it considers the ESG factors.”
Rethinking ESG and responsible investing
One topic that arose during the webinar included misconceptions surrounding ESG factors and questioned the heavy politicization surrounding the trend in the last years.
Panelist Allison Wielobob, who is general counsel of the American Retirement Association (ARA), pointed to the “environmental” aspect of ESG as the primary reason for its severe politicization.
“For some reason, the ‘E’ [factor] really gets under people’s skin and in this context,” she said.
Wielobob compared the use of ESG to Ave Maria mutual funds, a U.S. mutual fund for clients that want to invest in companies who do not violate certain religious principles under the Catholic church. While little controversy is known on the latter, ESG mutual funds have found themselves on the edge of disagreement for years.
“On what some of the opponents of ESG investing are saying, [Ave Maria funds] would be out as well,” she said. “I just think that some of some of the voices out there are unfortunately blinded when they see the letter ‘E’ and that’s where the misinformation cascade begins,” she said.
John Hoeppner, head of U.S. Stewardship and Sustainable Investment for LGIM, added a similar sentiment during the panel. “If you replace [ESG] with context information about your investments, it’s a lot easier to have a really good, high-quality discussion with someone,” he said.
“We think the best way to really move the debate forward is to analyze very practical risk return considerations of having a stable workforce or understanding flood risks, or really isolating real risk and return examples,” he concluded. “That helps move the conversation forward.”
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