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Department of Labor takes a 180 Degree Turn on ESG Investing

Photo of author, Monica Garver, CPA, CFP®, AIFA®, CDFA®.
Monica Garver, CPA, CFP®, AIFA®, CDFA®
Director of Retirement Plan Services and Financial Strategist
  • Proposed regulations published in December allow plan fiduciaries, when evaluating investments, to consider climate change and other environmental, social and governance (ESG) issues as risk factors affecting workers' financial security.
  • At the very end of the Trump administration, the Department issued final regulations on ESG investing. Practically speaking, these regulations made it difficult for plan fiduciaries to add ESG options. Nonfinancial factors such as climate change and racial diversity could only be considered as a tie breaker. In March of last year, the Biden Administration announced that it would walk back these rules.
  • The Department has gone back and forth for many years on its position regarding ESG investing. Democrats endorse the concept while Republicans are more skeptical. The fact that the latest proposed regulations are such a radical departure from the Trump rules suggests that this back and forth will only continue.
  • These proposed regulations seem to go beyond just permitting consideration of ESG factors. Comments from administrative officials accompanying the publication of these regulations indicate that the current thinking of the Department is that ESG factors, and climate change issues in particular, pose financial risks that plan sponsors should consider as prudent fiduciaries in evaluating investments.
  • Significantly, the proposed regulations would permit the use of ESG investments as the qualified default investment alternative (“QDIA”).
  • Over 200 comments have been submitted regarding these proposed regulations. The majority are favorable. However, some comments express concern that these proposed regulations may be interpreted as not only permitting but requiring plan fiduciaries to consider ESG factors in making prudent investment decisions.
  • The Securities and Exchange Commission has not issued any rules regarding ESG investments and comments from the Commissioner indicate there are no plans to do so.
  • When voting proxies, the proposed regulations also make it clear that, in contrast to the Trump rules, plan fiduciaries may take into consideration climate change, environmental and social concerns.
  • Two things to ponder. Promulgating a regulation that contains specific criteria for evaluating investments is unprecedented. While the Securities & Exchange Commission and other financial regulators have promulgated many rules over the years, there are none that establish specific criteria that must be applied to evaluate a particular investment. Also, one has to wonder how Department officials think they are helping plan fiduciaries with the never-ending back and forth on ESG investing.
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