Lifting a Trump-era cloud that has hung over fiduciary advisors who wanted to add ESG investments to their clients’ retirement plans, the U.S. Labor Department proposed a rule today that would explicitly allow advisors to consider environmental, social and governance factors when selecting investments and exercising shareholder rights.
The proposal (https://www.federalregister.gov/public-inspection/2021-22263/prudence-and-loyalty-in-selecting-plan-investments-and-exercising-shareholder-rights) would explicitly allow consideration of ESG factors for retirement plans and as part of fiduciary duties regarding proxy voting, “while setting aside the previous administration’s final rules on the use of ESG factors in selecting plan investments, including a prohibition on considering ESG options as a qualified default investment alternative,” Brian Graff, CEO of the American Retirement Association (ARA), said in a statement.
The proposal represents a reversal of rules created under the Trump administration that put restrictions on advisors' ability to impelement ESG investing for retirement plan assets.
After taking office, President Joe Biden issued executive orders ordering the DOL to suspend or revise all of Trump’s ESG and proxy voting rules. EBSA announced in March that it would not enforce either Trump’s ESG or proxy rule.
Proposed by the DOL’s Employee Benefits Security Administration’s, the draft rule will “remove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance factors when they select investments and exercise shareholder rights,” DOL said in an announcement.
“A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers,” Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration, said in a release.
The proposal “will bolster the resilience of workers’ retirement savings and pensions by removing the artificial impediments – and chilling effect on environmental, social and governance investments – caused by the prior administration’s rules,”
The proposed rule states that if a fiduciary “prudently concludes that competing investments or investment courses of action equally serve the financial interests of the plan over the appropriate time horizon, the fiduciary is not prohibited from selecting the investment, or investment course of action, based on collateral benefits other than investment returns.”
Further, when an advisor selects a designated investment alternative for an individual account plan, “the plan fiduciary must ensure that the collateral-benefit characteristic of the fund, product, or model portfolio is prominently displayed in disclosure materials provided to participants and beneficiaries,” DOL said.
That is keeping with what the DOL said has been its “longstanding position that ERISA fiduciaries may not sacrifice investment returns or assume greater investment risks as a means of promoting collateral social policy goals.”