Dept. of Labor rule would allow fiduciaries to consider ESG risks in retirement plans

The U.S. Department of Labor (DOL) issued a proposed rule on Oct. 13 that would remove barriers that would allow retirement plan sponsors and fiduciaries to consider climate change and other environmental, social and governance (ESG) factors when selecting investments.

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The proposed rule, called Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, is in line with Executive Order 14030, signed by President Joe Biden on May 20. The order directs the federal government to implement policies to help safeguard the financial security of America’s families, businesses and workers from climate-related financial risk that may threaten the life savings and pensions of U.S. workers and families.

“The proposed rule announced today will bolster the resilience of workers’ retirement savings and pensions by removing the artificial impediments – and chilling effect on environmental, social and governance investments – caused by the prior administration’s rules,” Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar said on Wednesday. “A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”

The DOL will accept comments on the proposed rule for 60 days after publication in the Federal Register.

SIFMA, an association that represents the securities industry, commended the proposed rule. “SIFMA appreciates the Department of Labor’s work in engaging with the financial services industry as they put together this proposal. We are pleased to see the Department headed in the right direction, which will help investors prepare for their retirement,” Kenneth Bentsen, Jr., SIFMA president and CEO, said.

The Environmental Defense Fund also praised the proposal.

“Climate change presents a serious and growing threat to our financial system. Experts and governmental entities are increasingly reaching this same conclusion, from last month’s New York Federal Reserve Bank report to recent efforts by the Commodity Futures Trading Commission,” Michael Panfil, director of climate risk strategies at the Environmental Defense Fund, said. “Today’s proposal would give retirement plan managers the ability to make the best possible decisions for their clients after taking all risks into consideration – including the risks posed by climate change.”