The U.S. Department of Labor (DOL) today announced a final rule on environmental, social, and governance (ESG) investing that reversed previous restrictions enforced by former President Donald Trump’s administration.
In its announcement, the DOL stated that retirement plan fiduciaries can consider climate change and other ESG factors when selecting investments for retirement plans, including 401ks. Now under President Joe Biden, the DOL ruling says that retirement plan fiduciaries are obligated to take ESG factors into consideration to “protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.”
The rule was first proposed in October 2021 as “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” by the DOL’s Employee Benefits Security Administration (EBSA), and made it to the White House last month.
Industry thought leaders have since shared insights and commentary on the rule’s approval of ESG investments in retirement plans.
Jessye Waxman, Senior Campaign Representative of Sierra Club, an environmental organization, amplified the message that considering ESG is a part of a fiduciary’s duty. “The management of systemic risks, such as climate change, is a fundamental part of fiduciary responsibility and is critical to protecting the savings of workers and retirees,” she said. “The Department of Labor’s ruling removes the barriers to the responsible management of these risks that were put in place by politically motivated actors. This decision lays the groundwork for future rulemakings that establish affirmative duties of retirement fund fiduciaries to manage climate and other systemic risks.”
Although Trump’s rulings were never enforced, the rules would have required fiduciaries to limit investments and related decisions to “pecuniary” factors, raising doubts on whether climate change and other sustainability options would qualify. The DOL’s recent ruling reverses this previous administration’s stances, saying it “unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.”
Rachel Curley, democracy advocate at Public Citizen, a Washington, D.C.- based non-profit and think tank, said the ruling comes at a time when more workforces are paying close attention to socially responsible and sustainable strategies. “Shareholders, customers, and even large institutional investors are increasingly recognizing that it is vital to take into account whether a company faces financial risk due to the way it treats its workforce, whether it pays its fair share of taxes, how it engages in federal and local politics, what’s happening in its supply chain, and whether the company is ready for a greener future,” she said. “The DOL rule is a win for retirement savers as their portfolios managers will be able to account for these critical long-term risks.”
“ESG is a framework for assessing holistic risks to an investment, a critical job of all retirement plan fiduciaries,” added Andrew Behar, CEO of As You Sow, a non-profit organization dedicated to corporate sustainability. “In this ruling, the DOL has not told ERISA trustees how to invest, only that they can consider financially material environmental, social, and governance risks when evaluating the quality and safety of an investment. By encouraging more resilient portfolios, the rule will better insulate beneficiaries’ savings from the myriad risks facing the markets.”
Not all industry associations and organizations are likely to be in favor of the final rule, however. ESG generally remains a partisan issue, with the majority of Democratic individuals supporting corporate sustainability and most Republicans opposing it. National Review, an American conservative editorial magazine, published an article last week calling on leading asset management firm BlackRock to deemphasize its ESG investing strategy, and questioned whether it leads to best investing performances.
Regarding proxy voting, the DOL’s final rule erases a Trump-era provision that said, “the fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right.” The DOL eliminated the ruling, explaining that it may be “misread as suggesting that plan fiduciaries should be indifferent to the exercise of their rights as shareholders, even if the cost is minimal.”
Rick Alexander, CEO of The Shareholder Commons, commended the ruling, adding that it minimizes the impact of shareholders interest upon those of the investors. “The new DOL rule clarifies that pension funds, like other diversified investors, have the ability to protect the interests of their beneficiaries by using shareholder rights to make sure that companies do no harm to the social and environmental systems upon which investment portfolios depend,” he said. “The rule helps to ensure that workers’ retirement savings are used exclusively for their benefit when their interests might clash with those of the executives at the companies they own.”
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