In what could be a major boon for the long-term growth of environmental, social, and governance (ESG) funds, the Department of Labor announced on Tuesday that it will allow the use of ESG funds in 401(k) plans, reversing the prior administration’s opposite policy.
While exchange traded funds are making gradual inroads in the 401(k) space, the Labor Department’s decision could spur more adoption of ESG funds of all types across a variety of usage cases. Translation: It’s possible that as more workers add ESG index funds and the like to employer-sponsored retirement plans, they may add ESG ETFs to discretionary accounts or their self-directed retirement accounts.
Additionally, the Labor Department’s decision is seen as empowering investors and, believe it or not, removing some of the politicization from the ESG fund conversation.
“In particular, careful retirement plan investors may often want to consider environmental, social and governance factors, or ‘ESG’ factors, as they measure the potential value of a particular investment option,” according to the department. “Research shows that companies can be more profitable than their competitors when they treat their workers fairly, run their business with an eye on its impact on the environment, and ensure gender, ethnic and cultural diversity on their executive teams. If retirement investors can’t take these factors into account – even when it would benefit you financially – that’s a problem.”
The Labor Department didn’t make the decision simply to undo something the prior administration committed to. That type of pettiness doesn’t serve investor outcomes. Rather, stakeholders were involved in the process.
“As part of our deliberations, we’ve listened as investment managers, labor organizations, corporate America, consumer groups, service providers, investment advisers and workers shared their experiences with considering ESG factors in investing retirement funds. We also received comments on our proposed ESG rulemaking effort we announced last year. After considering all of the feedback, we decided that we should revisit the previous administration’s rulemaking, and that a new approach is needed,” added the Labor Department.
Well-known ESG ETFs on the market today include the SPDR S&P 500 ESG ETF (EFIV), the SPDR Bloomberg SASB Emerging Markets ESG Select ETF (REMG), the SPDR Bloomberg SASB Corporate Bond ESG Select ETF (RBND), the SPDR MSCI USA Gender Diversity ETF (SHE), and the SPDR MSCI USA Climate Paris Aligned ETF (NZUS).
For more news, information, and strategy, visit the ESG Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.