Pension funds can adopt ESG principles, DoL says

October 15, 2021

The US Department of Labor (DoL) has reversed a controversial measure implemented under former president Donald Trump that would have inhibited pension funds from considering climate change and other environmental, social and governance factors when selecting investments and exercising shareholder rights.

The rule, brought in towards the end of last year, faced significant opposition from US pension funds as well as other major investors in North America and Europe.  

The DoL has now stated that it intends to implement significantly more stakeholder outreach in order to ascertain how to better craft rules on ESG integration for fiduciaries while ensuring they uphold their other obligations to plan members. 

The department alluded to the fact that some aspects of the current regulation may have created uncertainty as to whether retirement plan fiduciaries may reasonably pursue ESG considerations in their investment and proxy decisions for the benefit of members.  

“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,” said Ali Khawar, acting assistant secretary for the Employee Benefits Security Administration, part of the DoL. 

The changes state that if a fiduciary concludes that a climate change or other ESG factor is material to an investment course of action, the fiduciary can and should consider it and act accordingly, as would be the case with any other material risk-return factor. 

The proposal also seeks to eliminate a paragraph from the current regulatory document that states: “The fiduciary duty to manage shareholder rights appurtenant to shares of stock does not require the voting of every proxy or the exercise of every shareholder right.” 

Voting proxies, the DoL says, is a “crucial lever” in prioritising shareholder interests and protecting their rights.

US SIF, the sustainability investment forum, said in a statement: “We appreciate the work done by DoL to address the damage done by the previous administration and to ensure that ERISA fiduciaries have new rules for the road. The proposed guidance should help address the gap between the growth of sustainable investment overall and the much more limited growth of sustainable investment in retirement plans.”

This story marks the latest roll-back of trump era anti-ESG measures.