Few retirement plans currently give savers the option to make investments based on environmental, social and governance principles

More retirement savers could soon have the option to invest in funds based on environmental, social and governance principles, under final regulations issued by the Labor Department on Tuesday.

The new rule reverses a move by the Trump administration in 2020 that made it harder for 401(k) plans to put ESG investments on the menu. That regulation went into effect shortly before President Biden took office, but the administration moved to replace it.

“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions,” when selecting 401(k) investments and exercising proxy voting, Labor Secretary Marty Walsh said. 

ESG funds have grown in popularity in recent years as individuals seek to invest in ways more consistent with their own values, and to benefit from growth in sectors such as renewable energy.

Globally, these funds collectively held some $2.2 trillion as of Sept. 30, according to Morningstar Inc.’s Morningstar Direct unit. U.S. sustainable funds held $272 billion.

Relatively few 401(k) plans offer ESG investments, in part because of regulatory changes from one administration to the next.

Lisa Gomez, assistant secretary for the Labor Department’s Employee Benefits Security Administration, said regulators heard from 401(k) plan sponsors and others in the retirement industry that the Trump-era regulation “had a chilling effect on being able to consider climate change and other ESG factors in making decisions” about investment offerings.

The new rule allows employers to consider climate change and other environmental, social and governance effects when selecting 401(k) investments and exercising shareholder rights, such as proxy voting, she said. Employers must put the financial interests of employees first and cannot sacrifice potential returns for these goals, she added.

Currently, 13% of 401(k) plans offer socially responsible investment options to employees, according to data that Vanguard Group publishes on the 401(k) plans it administers.

Demand for such investments in 401(k) plans is likely to grow, especially from younger workers, industry observers said.

Many financial services firms have expressed support for the rule of the Labor Department and are rolling out ESG offerings, so far mainly to investors outside 401(k) accounts, to meet demand. Supporters include the Defined Contribution Institutional Investment Association, a research and advocacy organization for investment managers, consultants and others in the 401(k) industry, including Fidelity Investments and BlackRock Inc.

The financial industry tends to charge higher fees for ESG funds. Sustainable funds cost an average of 0.55% of assets in 2021, compared with 0.39% for traditional peers, according to Morningstar Direct.

ESG funds in the U.S. attracted $9.2 billion of new money in the first three quarters of 2022, down from $39 billion of new money in the first half of 2021, according to Morningstar Direct.

US Department of Labor announces final rule to remove barriers to considering environmental, social, governance factors in plan investments

The U.S. Department of Labor today announced a final rule that allows plan fiduciaries to consider climate change and other environmental, social and governance factors when they select retirement investments and exercise shareholder rights, such as proxy voting.

After extensive consultations and feedback from a wide range of stakeholders, the department concluded that two rules issued in 2020 during the prior administration unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.

“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits,” said Secretary of Labor Marty Walsh. “Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement.”

The rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” follows Executive Order 14030, which was signed by President Biden on May 20, 2021. The order directs the federal government to identify and assess policies to protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.

“The rule announced today will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments,” said Assistant Secretary for Employee Benefits Security Lisa M. Gomez. “Climate change and other environmental, social and governance factors can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers.”

The rule will be effective 60 days after its publication in the Federal Register except for a delayed applicability until one year after publication for certain proxy voting provisions to allow fiduciaries and investment managers additional time to prepare.

To learn more about the new rule follow these links:

https://www.dol.gov/newsroom/releases/ebsa/ebsa20221122

https://www.dol.gov/sites/dolgov/files/ebsa/temporary-postings/prudence-and-loyalty-in-selecting-plan-investments-and-exercising-shareholder-rights-final-rule.pdf

To learn more about ESG read these articles:

https://socialk.com/blog/10-reasons-why-esg-is-sustainable-and-wont-be-stopped/

https://socialk.com/blog/lets-talk-esg/

https://socialk.com/blog/who-benefits-from-the-fight-against-esg/