Blog: ESG 401(k) Investing Rule to Make Good on Biden Climate Vow (1) – Bloomberg Law

The US Labor Department says it has clinched a key policy in the Biden administration’s fight against climate change by easing restrictions on environmental and socially conscious retirement investing.

A copy of the department’s final rule emailed to Bloomberg Law Tuesday makes clear that retirement plan decision-makers called fiduciaries may—but aren’t required to—consider the effect environmental, social, and corporate governance factors have on an investment or when exercising shareholder voting rights.

The rule reverses course on a pair of Trump-era regulations the department says chilled fiduciary action. It follows two executive orders that required a review of former President Donald Trump’s climate-related rules and called on the DOL to “suspend, revise, or rescind” ESG regulations.

The rule wasn’t immediately published for public inspection in the Federal Register Tuesday morning.

ESG investing is still rare in 401(k)s, but the Biden regulation could open up pathways for major environmentally friendly money managers such as BlackRock Inc. to market new investment options. The regulation’s development comes at a moment when many red states are rebuking what they call a “woke” investment agenda peddled by the White House.

By tying climate factors to the financial considerations retirement investors are already required to make, the DOL in its initial rulemaking broadly authorized consideration of ESG factors in default investment options and proxy voting decisions.

The final rule eliminates a provision in the proposed rule stating that a fiduciary’s evaluation of potential retirement assets “may often require” a consideration of ESG factors. A senior department official said the agency agreed with commenters who feared the word “often,” without further definition, amounted to an ESG mandate.

The rule makes clear that retirement plan fiduciaries “can but are not required to consider the effects” of climate change, said Lisa M. Gomez, assistant secretary for DOL’s Employee Benefits Security Administration. It clarifies a fiduciary’s long-standing duty of prudence and loyalty under the Employee Retirement Income Security Act of 1974 (Pub.L. 93-406).

“This rule is really a common-sense basic concept of ERISA,” Gomez said in a press conference Tuesday. “Fiduciaries are required to act prudently and for the exclusive purpose of participants and beneficiaries in everything they do—including making investment decisions and proxy voting.”

The agency also added language that would allow retirement plan officials to consider investments that would increase participation levels in the plan.

Broad Support

ESG retirement investing emerged as a political flashpoint under prior administrations that volleyed sub-regulatory guidance over whether those considerations can be financially material.

The final rule announced Tuesday drew early support from Democratic lawmakers who supported proposed legislation last year that would have codified environmental considerations in retirement plan decision-making.

“Financial security is about planning for the future, and you just can’t plan for the future if you aren’t allowed to consider the environmental, social, and governance factors that are shaping it,” said Sen. Patty Murray (D-Wash.) in an emailed statement Tuesday.

Environmentally friendly financial firms and nonprofits that have supported the department’s relaxed standard on ESG considerations applauded the conclusion of the agency’s rulemaking project, but advocates began identifying new goals to push the ESG retirement needle even further.

“We look forward to collaborative work to see that this rule benefits workers to the fullest extent possible, while continuing to advocate for the DOL to set a minimum standard for the consideration of systemic risks to workers’ retirement savings,” said Natalia Renta, senior policy counsel for corporate governance and power at the Americans for Financial Reform Education Fund.

By softening its approach on language that critics of the proposal feared would require ESG retirement investing, the department struck enough of a neutral approach, said Elena Barone Chism, deputy general counsel at the Investment Company Institute.

“ICI welcomes the department’s clarification that, while fiduciaries may include consideration of climate change and other ESG effects as part of their risk-return analysis, they must put the financial interests of plan participants first and cannot sacrifice potential returns for these goals,” Chism said.

(Updated with additional reporting throughout. )

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