Biden administration relaxes Trump-era ESG rules for 401(k) plans

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On Tuesday, the Biden administration issued a final rule that makes it easier for employers to consider climate change and other environmental, social and governance factors when choosing investment funds for their 401(k) plans.

The US Department of Labor law, which goes into effect in 60 days, undoes regulations that were put in place during the Trump administration.

Those earlier rules, passed in 2020, had a “chilling” effect that effectively sidelined employers from weighing ESG factors when selecting 401(k) funds, senior Labor Department officials said during a press call Tuesday. .

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An investment in ESG is also known as a sustainable or impact investment. There are many flavors of ESG boxes; They might, for example, funnel investors’ money to wind and solar energy companies or those with diverse board members, or direct money away from fossil fuel companies.

ESG funds have grown more in recent years. Investors poured $69.2 billion into it in 2021, an annual record, according to Morningstar. However, uptake into 401(k) plans has been slow.

The Inflation Reduction Law is expected to further enhance the popularity of ESG investment. The law, signed into law by President Joe Biden in August, represents the largest federal investment to combat climate change in US history.

What do the Biden ESG rules do?

Employers have a legal duty to thoroughly evaluate the funds’ risk and return when selecting 401(k) plan investments; For example, they cannot subordinate the financial interests of workers in favor of an issue like climate change.

The new ESG rules do not change these duties.

However, they explained that companies can “include the economic impacts of climate change and other ESG considerations” when making investment choices — something Lisa Gomez, assistant secretary of labor at the Employee Benefits Security Administration, calls “common sense.”

“While climate change is a critical issue, this is not the case [just] What is this rule,” Gomez said.

MSCI CEO says ESG

Employers also aren’t violating their legal duties by taking ESG employees’ interests into account when crafting a pool of 401(k) mutual funds, according to the new rule; She said this could lead to more sharing among workers and thus more retirement security.

The Biden administration’s action on Tuesday follows a March 2021 directive that it would not enforce Trump-era rules. The administration then suggested that those rules be reviewed in October 2021; Tuesday’s action updates this proposal according to feedback from the public.

Biden’s new regulations eliminate certain elements of Trump-era rules that Labor Department officials said have discouraged employers from using ESG funds.

For example, the previous rules did not explicitly mention ESG, and required employers to choose investments based solely on “financial” factors — a term that essentially disqualifies employers from selecting funds with any kind of “ethical” component, Labor Department officials said. .

The new Biden administration rules erase that requirement.

“Whether it is E, S, or G… direct or indirect, large or small, the [ESG] “The protective factor also fosters a moral element,” said a senior DOL official, who spoke on condition of background only.

The new rules also remove restrictions that prevent employers from using the ESG fund as a default option for workers automatically enrolled in their 401(k) plans — an increasingly popular way to boost retirement security. In legal parlance, these funds are known as a Qualified Specific Investment Alternative, or QDIA.

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