UPDATE: Dec. 1, 2022: The U.S. Department of Labor published its final rule today on retirement plan fiduciaries' consideration of environmental, social and governance factors under under Title I of the Employee Retirement Income Security Act of 1974. The rule is effective Jan. 30, 2023.
The U.S. Department of Labor announced last week a final rule permitting retirement plan fiduciaries to consider environmental, social and governance factors. DOL in a Nov. 22 press release shared details of the rule that will soon appear in the Federal Register.
The final rule amends a 2020 rule issued by the Trump administration under Title I of the Employee Retirement Income Security Act of 1976. The amended rule states that a fiduciary must make investment determinations based on factors that it reasonably determines are relevant to a risk and return analysis, and that such factors may include ESG factors such as climate change.
It also amends language concerning proxy voting policies; deletes the “pecuniary” and “non-pecuniary” terminology used in the 2020 final rule; and removes stricter rules imposed on qualified default investment alternatives, among other provisions.
DOL’s Employee Benefits Security Administration initially proposed a rule to amend the 2020 regs in October 2021. The final rule is set to take effect 60 days after its publication in the Federal Register, but certain proxy voting provisions will have delayed applicability until one year after publication, DOL said.
In a virtual event last year that followed the proposed rule’s publication, Ali Khawar, DOL's principal deputy assistant secretary of EBSA, told attendees that the department sought to address what Khawar called a “chilling effect” on investor behavior resulting from the 2020 rule. Fiduciaries, Khawar said, had backed away from taking ESG factors into account after the rule’s publication.
In its final rule last week, DOL again referenced the effects of the 2020 regs on investors, stating that the Trump administration rule created uncertainty and discouraged fiduciaries from considering ESG factors, even when such considerations were in the financial interest of plans.
“This uncertainty may further deter fiduciaries from taking steps that other marketplace investors take in enhancing investment value and performance or improving investment portfolio resilience against the potential financial risks and impacts associated with climate change and other ESG factors,” the department added.
Interest in ESG investing has grown in recent years. A survey of 1,000 U.S. investors by asset management firm Schroders found that 74% of respondents would, or might, increase their contribution rates if they were offered ESG investment options, and 40% said that having the ability to invest in ESG options would improve how they viewed their employers. The most frequently cited ESG issues in the survey included employee welfare, wages, climate change and human rights, Schroders said.
Even so, one June 2022 survey of defined contribution plan participants by researchers with PGIM and the Employee Benefits Research Institute found that only 8.9% of participants with access to plans that offered at least one ESG fund had any allocation to an ESG fund. Critics of ESG funds, meanwhile, argue that the funds lack global standards for defining and measuring performance.
DOL said that its final rule does not change fiduciaries’ existing duties to focus on relevant risk-return factors and refrain from subordinating participants’ and beneficiaries’ interests to objectives that are unrelated to the provision of benefits.
“The Department has a longstanding position that ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals,” DOL said. “These proscriptions flow directly from ERISA’s stringent standards of prudence and loyalty under section 404(a) of the statute.”