DOL Finalizes Rule Opening Door to ESG Investing in Retirement Plans

The U.S. Department of Labor on Tuesday announced a final rule that retirement plan fiduciaries can consider climate change and other environment, social and governance factors when they select investments for retirement plans like 401(k)s, overturning a rule passed under former President Donald Trump that plan fiduciaries only consider “pecuniary” factors.

The news finalizes a discussion started more than a year ago to allow workplace retirement plan providers and their advisers to consider ESG factors when designing plan investments. The initial DOL proposal, made in October 2021, caused a stir in the industry in its reaction to the Trump-era DOL, which had warned against the integration of climate change and ESG factors with the rationale that it would not meet a fiduciary’s obligation to make the best investment decision for participants.

The rule follows an Executive Order from President Joe Biden, to “protect the life savings and pensions of America’s workers and families from the threats of climate-related financial risk.”

The final rule, which now explicitly allows for ESG investing, “can be useful for plan investors as they make decisions about how to best grow and protect the retirement savings of America’s workers,” the DOL said.

The ruling also allows fiduciaries to consider climate change and ESG factors when selecting a Qualified Default Investment Alternative and exercising shareholder rights, such as proxy voting.

“The rule announced today will make workers’ retirement savings and pensions more resilient by removing needless barriers, and ending the chilling effect created by the prior administration on considering environmental, social and governance factors in investments,” Assistant Secretary of the Employee Benefits Security Administration Lisa M. Gomez said in a statement.

The “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” rule comes at the direction of an executive order signed by Biden on May 20, 2021. It will be effective 60 days after its publication, the DOL said.