The U.S. Department of Labor (DOL) announced the release of a final rule permitting the consideration of climate and ESG factors in private employer-sponsored retirement plans (ERISA), marking a significant reversal of Trump-era rules designed to prevent the incorporation of these factors into the investment process.
The new laws will also permit fiduciaries to consider climate and ESG considerations when exercising shareholder rights, such as proxy voting.
U.S. Labor Secretary Marty Walsh stated:
"Today's rule establishes that retirement plan fiduciaries may consider the possible financial benefits of investing in companies committed to positive environmental, social, and governance initiatives when advising plan members on how to maximize their retirement benefits. Removing the limits placed on plan fiduciaries by the previous administration will help American workers and their families invest for a safe retirement."
In June 2020, the Trump administration's DOL proposed a rule that would effectively impose tight restrictions on ESG investments in ERISA plans. The idea was finalized by the DOL later that year despite strong opposition from investors and other sustainability-focused groups who deemed it obsolete and unproductive. In a further blow to ESG-focused investors, the DOL also announced guidelines governing proxy voting, limiting the capacity of investment managers to promote sustainability goals through investments and implying that proxy voting on ESG concerns is not in investors' best interests.
In May 2021, President Biden instructed the Department of Labor to explore overturning Trump-era regulations as part of an executive order instructing federal agencies to establish policies to limit climate-related financial risk and protect investors' savings and pensions.
The new rule makes it clear that decisions "must be based on factors that the fiduciary reasonably thinks are relevant to a risk and return analysis," like how climate change or other ESG issues affect an investment's economy."
According to Lisa Gomez, Assistant Secretary for Employee Benefits Security at the Department of Labor, the new regulation will eliminate "unnecessary restrictions" and stop "the chilling effect produced by the previous administration on addressing environmental, social, and governance factors in investments."
"Plan investors can utilize climate change and other environmental, social, and governance concerns to choose how to best develop and protect the retirement funds of American workers."
Sustainable investment-focused organizations applauded the DOL's new regulations. Greg Hershman, head of U.S. policy for the Principles of Responsible Investment (PRI), issued the following statement in response to the ruling:
"The PRI appreciates this final rulemaking from the DOL, which strives to provide much-needed clarity for private pension administrators as they seek to meet their fiduciary responsibilities and support the investment objectives of their beneficiaries. The new regulation, which reverses a 2020 rule that was passed over significant opposition, eliminates obstacles that prevented managers from taking climate risk and other ESG concerns into account when making investment decisions and exercising shareholder rights. Reducing misunderstanding and giving clarity to ERISA plans that wish to incorporate ESG concerns into their investment decisions would enable market participants to keep up with growing global investor practices and adapt to a market that is fast changing."