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Labor Proposal Stakes Out Final Word on ESG Retirement Investing

Nov. 24, 2021, 7:43 PM

A proposed Biden administration rule making it easier for retirement plans to invest in environmental and socially conscious funds has the potential to settle a perennial debate over do-good investments in workers’ savings.

The U.S. Labor Department proposal, announced last month and wending its way through a two-month notice and comment period, would reverse ex-President Donald Trump’s regulations on environmental, social, and corporate governance factors, expressly permitting ESG considerations when selecting investments or exercising shareholder voting rights on behalf of plan participants.

Its non-final nature hasn’t stopped observers from declaring the fight finished, that ESG proponents have already won.

“The issue of whether ESG can have an impact on investment performance from a risk-return standpoint—that ship has sailed,” said George Michael Gerstein, fiduciary governance and ESG co-chair at Stradley Ronon Stevens & Young LLP in Washington, D.C. “Even if a Republican wins the White House in 2024, it seems to me much less likely that this is going to remain an issue.”

Trump’s ESG and proxy voting rules—introduced and finalized in the prior administration’s waning hours—limited investments and fiduciary decision-making to “pecuniary” factors. The Biden DOL said last month that those constraints had a “chilling effect” on pension investors interested in considering the financial implications of climate change or employee working conditions.

ESG retirement investing emerged as a political flashpoint under prior administrations that volleyed sub-regulatory guidance over whether those considerations can be financially material—the legal requirement for investment decisions in federally regulated private-sector plans.

Market Primed

Away from that political scrutiny, however, ESG considerations have flourished in the commercial market. Sustainable investments now account for more than twice the assets under management as they did just four years ago, according to The Forum for Sustainable and Responsible Investment.

Biden’s proposal enters a market already primed to incorporate those environmental and socially conscious aspects, despite the party in power.

Past administrations dealt with the issue by guiding plan fiduciaries on how they should or shouldn’t factor in socially conscious investment criteria as an isolated category of “collateral benefits,” somewhat separate from strictly statutory considerations under the Employee Retirement Income Security Act of 1974.

ERISA establishes a prudent standard of care, requiring fiduciaries to act “with the care, skill, prudence, and diligence” a hypothetical prudent person in a similar set of circumstances would choose. Investments, the statute continues, are “for the exclusive purpose of: providing benefits to participants and their beneficiaries” as well as paying reasonable administrative expenses.

In its proposed rule published Oct. 13, the DOL’s Employee Benefits Security Administration directly tied those prudence and loyalty standards to issues like climate change, noting that in many instances fiduciaries “should consider climate change and other ESG factors in the assessment of investment risks and returns.”

“All of these decisions are fundamentally rooted in statutory obligations that they have to make prudent decisions and they have to be loyal,” said Acting Assistant Secretary for Employee Benefits Security Ali Khawar, after the department announced its rule.

Ping-Pong Match

The agency was uniquely specific in its proposed rule, said Ira Bogner, a partner at Proskauer Rose LLP in New York. By outlining specific examples of material risks, it disassociated with the political back-and-forth and focused on wise decisions. Companies that disregard environmental risks could face criminal or regulatory review, costing shareholders and, in turn, retirement plan participants.

“Let’s say you were looking at investing in a chemical distribution plant and that chemical distribution plant was dumping chemicals into the Hudson river,” Bogner said. “That would certainly be an environmental issue that you would probably need to look into from the perspective of a potential environmental contamination issue.”

In many ways, the Trump rules, which targeted “pecuniary” or monetary factors, didn’t prohibit ESG factors. In the aftermath of a Republican-to-Democrat ping-pong match, however, they soured fiduciaries eager to make savvy decisions in a 21st century market.

Large asset managers that otherwise serve defined-contribution plans or advise traditional pensions have injected the market with ESG-specific funds outside their retirement businesses. Blackrock Inc. projects sustainable indices could achieve a $1 trillion category by 2030, the fastest growing share of the market by far.

That growth solidifies the DOL’s proposed rule, perhaps bringing an end to the pendulum-like ESG-specific Labor regulations, said Sarah N. Lowe, a member at Frost Brown Todd LLC in Nashville, Tenn.

“I think it’s going to be hard to completely take it back because of the broader context of ESG factors in the market and the fact that a lot of asset managers are really focused on this,” she said. “It’s reached a crescendo in the non-legal space to where it would be really hard to go back.”

To contact the reporter on this story: Austin R. Ramsey in Washington at

To contact the editors responsible for this story: Andrew Harris at; Jay-Anne B. Casuga at