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Labor Secretary Marty Walsh

DOL Finalizes ESG Rule, Reversing 'Chilling Effect' of Trump-Era Version

The final rule includes language that clarifies plan fiduciaries can base decisions on factors they deem relevant, including “the economic effects of climate change and other ESG considerations.”

The US Department of Labor’s final rule on ESG considerations in plan investments will reverse the “chilling effect” of regulations from the Trump administration, according to a DOL official.

The announcement comes more than a year after the rule was first proposed. The new rule clarifies that plan fiduciaries can consider climate change and other ESG factors when selecting retirement investments.

DOL Secretary Marty Walsh said plan fiduciaries will be able to take the “potential financial benefits” of investing in companies committed to ESG, and criticized the President Donald Trump-era rule on ESG factors, which was finalized in October 2020 before the DOL under President Joe Biden pledged not to enforce the rule in March 2021.

"Removing the prior administration’s restrictions on plan fiduciaries will help America’s workers and their families as they save for a secure retirement,” he said.

The Trump-era rule intended to curtail plan fiduciaries’ consideration of ESG investment vehicles and risk analysis in private retirement plans, with then-Sec. Eugene Scalia arguing the rule would urge fiduciaries to consider investors’ financial interests, “rather than on other, non-pecuniary goals or policy objectives.” 

But Assistant Secretary for Employee Benefits Security Lisa Gomez said the new rule would remove “needless barriers” from fiduciaries advising on workers’ retirement savings, and end the chilling effect of the Trump-era rules on ESG considerations. 

The final rule adds text clarifying that a fiduciary’s duty of prudence is based on factors they determine are relevant, and that “may include the economic effects of climate change and other ESG considerations on the particular investment or investment course of action.”

The new rule also amends requirements for Qualified Default Investment Alternative provisions. The 2020 rule prohibited the use of ESG funds as QDIAs in plans, but the new rule clarifies that those standards are “no different” than standards for other investments. 

The new rule also allows fiduciaries to consider collateral benefits as “tiebreakers” when choosing between investments, a change from the Trump-era rule that argued investments must be “economically indistinguishable” before fiduciaries could consider other factors, according to a DOL summary. The new rule also retains the principles-based approach on shareholder rights from the 2020 version, while assuring that proxy voting is a “fiduciary act” subject to ERISA requirements.

Supporters of the DOL’s proposed rule (and critics of the Trump-era iteration) praised the DOL’s announcement, including US Sen. Patty Murray (D-Wash.), who chairs the Senate Health, Education, Labor and Pensions Committee. She called the finalized rule “a commonsense step.”

“Financial security is about planning for the future, and you just can’t plan for the future if you aren’t allowed to consider the environmental, social, and governance factors that are shaping it,” she said.

US SIF CEO Lisa Woll lauded the new rule, clarifying that considering ESG can help protect retirees’ long-term interests and should be treated akin to any other investment criteria.

“In reality, the rule is catching up to where the marketplace has been for years,” she said. “Investors understand that it is important to take into account how a company treats its workforce, whether it pays its fair share of taxes, their political spending, its supply chain and whether the company is ready for the transition to a low-carbon economy.”

There are some indications that plan participants are interested in ESG investment options, according to data from Schroders, which indicated that nearly three out of four plan participants who don’t know if they have ESG investment options in their plan would consider increasing their contribution rate if those were included, while 87% of respondents said they wanted their investments “to be aligned with their values.” Of the 31% of 401(k) plan participants who were aware of ESG options in their plan, nine out of 10 participants invested in them, according to Schroders.

The rule will go into effect 60 days after its been published in the Federal Register, although some proxy voting provisions will be delayed for an additional year to allow fiduciaries more time to get ready, according to the DOL.

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