In “Where Does ESG in Retirement Plans Stand Now?” WealthManagement.com turned to benefits and executive compensation partner Brad Campbell for insight on the Department of Labor’s (DOL) regulatory approach to include environmental, social and governance (ESG) funds in defined contribution plans’ lineups.
Campbell explained that upon taking office, President Joe Biden issued an executive order that directed the DOL to review the rule due to concerns about its effect and its rapid promulgation. He said that the DOL did so and decided in March that the financial factors rule was confusing fiduciaries, created a false impression that selecting ESG-related investments presented more fiduciary risk and was chilling appropriate investment in prudent ESG-related investments.
Accordingly, the DOL announced on March 10 that it was suspending enforcement of the financial factors rule. While the rule still exists on the books, the DOL will not enforce its requirements, he noted.
Further, the Biden administration has strongly signaled that prudent ESG-related investments are appropriate for Employee Retirement Income Security Act-defined (ERISA) contribution plans and that fiduciaries should consider appropriate ESG-related investments, Campbell said.
Additionally, Campbell stated that the semi-annual regulatory agenda released in June officially announced that the DOL would propose a new rule to replace the financial factors rule. The new rule likely will encourage ESG-related investments by ERISA plans. The new proposal modifying or replacing the financial factors rule is scheduled for September 2021.
“Given the two executive orders and the DOL’s suspension of enforcement of the old rule, we believe it is very likely that the new rule will strongly support ESG-related investments by ERISA plans,” said Campbell. “As Acting Assistant Secretary Khawar stated in the March 10 press release announcing the DOL’s suspension of enforcement, ‘We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that [ESG] integration can play in the evaluation and management of plan investments,” he emphasized.
Campbell explained that we are in the “in-between” time right now — the old rule is not being enforced, but the new rule is not yet written. He added that while fiduciaries do not have to avoid ESG-related investments, they do need to put them through the same prudent, thorough and well-documented process that they use to consider all plan investments.
ESG-related investments must be prudent based on all the criteria the plan would normally consider, but there is no reason to avoid ESG-related investments, Campbell maintained.
“We do, however, advise our clients against so-called ‘negative screening’ — that is, considering only ESG-related investments,” Campbell advised. “ESG investments may be prudently considered on the same terms as other reasonably available investments to the plan. They should not be considered exclusively.”