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‘No reason’ to stop US pension plans from choosing ESG default funds, says long-awaited DoL proposal

US Department of Labor unveils plans to ditch Trump-era rules that limit how workplace pensions can address ESG issues

The US Department of Labor (DoL) had today put forward a proposed rule that would remove Trump-era obstacles preventing US workplace pension schemes from considering ESG when investing, including using ESG funds for their default strategies. 

In its proposal Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, the DoL states that “if a fund expressly considers climate change or other ESG factors, is financially prudent, and meets the protective standards set out in the Department’s QDIA regulation…, there appears to be no reason to foreclose plan fiduciaries from considering the fund as a QDIA [Qualified Default Investment Alternatives]”.

The planned changes to the Employee Retirement Income Security Act (ERISA)  – the rules that govern workplace pension funds such as 401k plans, and which are enforced by the DoL – would also remove barriers that would limit fiduciaries from considering climate change and ESG factors when exercising proxy voting rights.

It was President Biden, as part of his executive order on climate-related financial risks published in May, that called on the DoL to “consider publishing”, by September, a proposal to “suspend, revise, or rescind” the controversial rules brought in by his predecessor, Donald Trump. Those rules, which only came into effect in January, required workplace pension schemes to solely consider financial factors when selecting investment funds or voting proxies. Many in the sustainable investment industry saw those changes to the ERISA as a blatant attempt to make it harder for scheme fiduciaries to consider ESG factors.

Earlier this year, Legal & General Investment Management America’s Head of US Stewardship and Sustainable Investments, John Hoeppner, told RI that “market sensitivity” to the DoL’s rules was the single biggest obstacle to ESG uptake in the US.

“Today’s announcement is an important step towards ending the regulatory pendulum that is holding back the inclusion of funds utilising ESG criteria in retirement plans and complicating proxy voting by plan fiduciaries,” said Lisa Woll, CEO of the US Sustainable Investment Forum.

Regulators are giving the public 60 days after the rule is formally published in the Federal Register to comment on the proposal.