Biden Could Reverse DOL's Rule against ESG Retirement Investing

The Biden administration could help reverse decisions under Trump’s U.S. Department of Labor that make it harder for fiduciaries of retirement plans to steer money toward environmental, social, and governance (ESG) funds.

In his first week of office, President Joe Biden has signed an executive order that will review the Labor Department’s 2020 ruling on ESG investments, or Financial Factors in Selecting Plan Investments, Bloomberg reports.

After the presidential election in November, the Department of Labor adjusted the Employee Retirement Income Security Act of 1974 to require fiduciaries of retirement pensions and 401(k) plans to put economic interests ahead of “non-pecuniary goals”, deterring them from looking at environmental, social, and governance investing.

“We are very pleased that the Biden Administration recognized the ESG rule as flawed and in need of immediate review,” Bryan McGannon, director of policy and programs at US SIF, told Bloomberg.

McGannon argued that the DOL should clarify that the ESG criteria is pecuniary and should re-write the rule to allow sustainable investments in default plans as Qualified Default Investment Alternatives.

When the so-called ESG rule was implemented by the DOL, it was meet with widespread opposition in the investment community. Many argued that it would take away important options from retirement investors and deny them access to strategies that mitigate ESG risks.

“In fact, rather than avoiding ESG analysis, we believe that 401(k) plan investment committees should have an obligation to consider ESG risk. Doing so is fundamental to evaluating the long-term performance of an investment,” according to Aron Szapiro, head of policy research for Morningstar.

“For instance, firms without a plan to cope with climate change may be caught flat-footed in the face of new regulation or environmental realities. And beyond being an issue of investor preference, human capital management is a financially material concern given the reputational and regulatory risks that companies face if they have poor labor relations. Many large asset managers already integrate ESG factors into their analysis for exactly this reason,” Szapiro added.

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