The Labor Department Reverses Trump’s Regulation on ESG Investment

Tuesday, the Labor Department revoked a Trump administration regulation prohibiting the inclusion of ESG-inclusive mutual funds in 401(k) retirement programs. The reversal means that climate change and other ESG factors can now be considered when selecting funds for retirement plans’ investment menus.

The regulation will go into effect sixty days following its publication in the Federal Register. Currently, plans can only evaluate elements connected to performance. Despite the rising popularity of ESG funds, it has been difficult for investors to locate such alternatives in their 401(k) plans. According to Morningstar, the average retirement plan will have less than 5% sustainable funds.

Today’s regulation establishes that retirement plan fiduciaries may consider the potential financial benefits of investing in firms dedicated to positive environmental, social, and governance initiatives when helping plan members maximize their retirement benefits, said Labor Secretary Marty Walsh. Removing the limits placed on plan fiduciaries by the previous administration would help American workers and their families invest for a safe retirement.

The Labor Department under the Trump administration had put additional restrictions on ESG products in retirement plans in 2020. These regulations advised plan fiduciaries to choose assets accessible to plan members based only on investment performance-related variables.

After President Biden assumed office, the Labor Department reviewed the Trump-era regulations and announced that new regulations would be issued. The Labor Department, which oversees retirement plans, determined in its study that the Trump-era rules unfairly restricted plan fiduciaries’ ability to consider ESG considerations when selecting assets, even when doing so would be financially beneficial to plan members.

The regulatory pendulum reflects a political tug-of-war over ESG investments and climate change mitigation measures. Several conservative state leaders have recently attempted to limit ESG investments in their jurisdictions. Governor Ron DeSantis of Florida and the State Board of Administration issued a resolution prohibiting the state from adopting ESG issues in its investment management processes, for instance. The state board of Florida invests and administers the Florida Retirement System Trust Fund’s assets. In the meanwhile, Texas has banned some asset managers. The state comptroller of Texas mandated that state retirement and education funds sell stakes in businesses like BlackRock, which the state accuses of boycotting the fossil fuel sector.

Some ESG detractors assert that funds that incorporate environmental, social, and governance considerations underperform their counterparts. Climate change, for instance, is said by proponents of ESG to constitute a significant long-term threat to many publicly listed companies and the globe.

Proponents of ESG hailed the Labor Department’s decision as a victory for retirement investors.

Fran Seegull, president of an advocacy group in the U.S. The rulemaking is timely and provides investors and fiduciaries with much-needed clarity on environmental and social. Governance factors are indeed important, given the recent wave of misinformed political attacks intended to undermine the validity of environmental, social, and governance investing, said Impact Investing Alliance in a statement. Instead of putting investment decisions at the mercy of politically influenced groups, the DOL’s logical approach puts employees and financial experts in charge.

In addition to other modifications, the new Labor Department regulation modifies what is known as a tiebreaker test, which administrators use to determine which investment options are economically equivalent. The rule does not prohibit plan fiduciaries from selecting investments based on collateral benefits (benefits other than investment returns). Still, it maintains the long-standing principle that the fiduciary may not accept lower returns or greater risks in exchange for collateral benefits.

A spokesperson for Employee Benefits Security stated climate change and other environmental, social, and governance considerations might be valuable for plan investors when deciding how to effectively increase and safeguard the retirement assets of American workers.