The U.S. Department of Labor (DoL) has ruled that fiduciaries of employee retirement plans can consider material ESG risks when making investment and proxy voting decisions, dealing a blow to anti-ESG sentiment.
In its recent announcement , the department concluded that two rules issued in 2020 during the prior administration “unnecessarily restrained plan fiduciaries’ ability to weigh environmental, social and governance factors when choosing investments, even when those factors would benefit plan participants financially.”
Investors are now able to make investments based on ESG considerations by claiming that these issues are financially material. The topic of whether to consider ESG issues as financially material has been explored at great length in the past several years, with the Securities and Exchange Commission (SEC) implementing a controversial rule in late 2020 claiming that ESG was not material when making investments. The new ruling reverses that decision.
It follows an executive order which was signed by President Biden in 2021 and directs the federal government to identify and assess policies to protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.
“Today’s rule clarifies that retirement plan fiduciaries can take into account the potential financial benefits of investing in companies committed to positive environmental, social and governance actions as they help plan participants make the most of their retirement benefits,” said Secretary of Labor Marty Walsh.
In a November 22 commentary, shareholder advocate As You Sow praised the newly released “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule.
“This new rule codifies ESG as a framework for assessing risk,” said As You Sow CEO Andrew Behar. “This is a core tenet of fiduciary duty and enables plan fiduciaries to act in their beneficiaries’ best interests to consider and minimize portfolio risk.”
“Many of the same companies that have announced ambitious greenhouse gas (GHG) goals to reduce climate risk nonetheless insist that federal law prohibits them from considering climate or other ESG risk in employee retirement plan options,” pointed out As You Sow President and Chief Counsel Danielle Fugere. “[The new] rule should prompt reconsideration by companies that are willing to address climate risk when it impacts their bottom lines, only to claim their hands are tied when it comes to protecting their employees’ retirement funds.”