Democrats Seek Legal Certainty for ESG Inclusion in Retirement Plans

Democrats on Capitol Hill have introduced a bill that would update the Employee Retirement Income Security Act of 1974 so that retirement plan managers can include environmental, social, and governance factors in investment decisions and that ESG investments are considered qualified default investment alternatives.

According to the new bill, the Financial Factors in Selecting Retirement Plan Investment Act, plans would have to consider ESG factors in a manner consistent with fiduciary obligations, the same standard that ERISA already applies to traditional investments, Pensions & Investments reports.

“Sustainable investment options are good for retirees and good for our environment — that’s a win-win,” Senator Tina Smith, D-Minn., said in a news release. “We’re putting forth this legislation because we know there’s a growing demand for sustainable investing, and because we believe Congress should act now to provide the legal certainty necessary to make sure workplace retirement plans are able to offer these options to workers across the country.”

The bill would also allow retirement plans to consider ESG factors as tiebreakers when comparing comparable options.

“ESG factors should continue to be valid considerations for investment decisions — including for qualified default investment alternatives and their components — so long as they are evaluated in a manner consistent with a prudent process,” Kenneth E. Bentsen Jr., SIFMA president and CEO, said in a statement.

The new bill would help reverse a Department of Labor rule under the Trump administration that said ERISA plan fiduciaries cannot hold “non-pecuniary” vehicles that would sacrifice returns or take on additional risk. The “Financial Factors in Selecting Plan Investments” or so-called ESG rule took effect in January, but the Biden administration has stated that it would not enforce the rule.

“Without this clarification, plan fiduciaries may remain reluctant to offer sustainable investment products in default options due to concerns about regulatory and litigation risks,” Lisa Woll, CEO of US SIF, said in a statement. “In fact, it is prudent for QDIA investments to consider long-term threats like climate change to protect the long-term interests of plan participants.”

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