The Department of Labor has issued a proposed rule that would empower ERISA fiduciaries to consider environmental, social and governance (ESG) factors when making investment decisions on behalf of plan participants and when voting corporate proxy ballots.

The proposal reverses the DOL rule enacted in late 2020, which inexplicably asserted ― despite abundant evidence to the contrary ― that ESG factors were not material to financial performance, thereby essentially prohibiting fiduciaries from including ESG funds in retirement plans.

A win for retirees

The new rulemaking is a great step forward. The transition to a more sustainable economy will require increased attention to material risks and opportunities, including those related to ESG factors. The DOL’s prior rule effectively prohibited consideration of such material factors, substituting instead the judgement of government bureaucrats for that of experienced investment professionals and fiduciaries. That put today’s workers and tomorrow’s retirees at risk, and it is encouraging to see that the department has reversed course.

The new proposed rule states that “Material climate change and other ESG factors are no different than other ‘traditional’ material risk-return factors.” As Employee Benefits Security Administration (EBSA) Acting Assistant Secretary Ali Khawar underscored, “in that context, fiduciaries should be taking them into account.”

At Impax, we couldn’t agree more. Careful consideration of ESG factors can help spotlight risks ― and opportunities ― that must be managed so that ERISA fiduciaries can uphold their responsibility to act in the best interests of plan participants. This is particularly the case as we transition to a more sustainable global economy, where environmental issues such as climate change and human capital issues such as diversity and inclusion will have more bearing on how companies and investment portfolios perform.     

“Careful consideration of ESG factors can help spotlight risks ― and opportunities ― that must be managed so that ERISA fiduciaries can uphold their responsibility to act in the best interests of plan participants.”

The evidence underscoring the materiality of ESG factors to business and investment risk is at this point overwhelming. An analysis of more than 2,000 empirical studies concluded that approximately 90% of the studies found a significant relationship between ESG factors and corporate financial performance, and the majority of studies found that the relationship was statistically significant, positive and stable over time.1

Under the proposed rule fiduciaries will now have the freedom to choose strategies that benefit participants’ economic interests while also addressing such ESG issues as climate change, gender and racial equality and other critical global challenges that are already influencing financial markets. This is good news for retirement investors.

The role of Congress

While this new rule is necessary, and prudent, it won’t vanquish the chilling effect created by the DOL’s shifting interpretations of ESG materiality from one administration to the next. Even with the new proposed rule in place some fiduciaries may be reluctant to include ESG options in retirement platforms for fear they will have to change course yet again under a new administration.

Congressional action would be welcome. It is high time to end the debate about whether sustainability or ESG factors are material. They clearly are. The market has spoken and now the Department of Labor has as well.   

Today there are nearly 400 sustainable mutual funds in the United States.2 Seventy-two percent of Americans are interested in sustainability-minded investments.”3 An RBC Wealth Management survey of 1,000 clients conducted earlier this year revealed that 61% want to increase the amount of environmental, social and governance-focused holdings in their portfolios.4 In fact, ESG funds attracted $51.1 billion from investors in 2020 ― the fifth consecutive year of record-breaking growth.2 Yet fewer than 5% of defined-contribution plans include at least one sustainable fund,5 despite this growing demand ― 69% percent of respondents to a 2021 Schroders study said they would or might increase their contribution amounts if their retirement plans included ESG options.6 The proposed rule gives plan administrators a green light to add the options that growing numbers of investors clearly want. 

The DOL rule is in the best interests of retirement plan participants. Should it be adopted, retirement plan sponsors will gain the additional leverage they need to evaluate a range of risks and opportunities arising as our global economy transitions to a more sustainable model. This will be critical to building resilient investment portfolios for plan participants in the years ahead. Indeed, their retirement security will depend on it.


This article first appeared in InvestmentNews.

1 Gunnar Friede, Timo Busch and Alexander Bassen, “ESG and Financial Performance: Aggregated Evidence from More Than 2,000 Empirical Studies,” Journal of Sustainable Finance & Investment, Volume 5, 2015. 

2 Jon Hale, “US Sustainable Funds Continued to Break Records in 2020,” Morningstar, Feb. 25, 2021.

3 Ray Sin, Ryan Murphy, and Sam Lamas, “The True Faces of Sustainable Investing,” Morningstar, May 3, 2021.

4 Jacqueline Sergeant, “Female Investors Expect Advisors To Be Informed About ESG,” Financial Advisor, April 8, 2021.

5 Samantha Lamas, Michael Thompson, “Re-Envisioning ESG in 401(k) Retirement Plans,” Morningstar, May 3, 2021.

6 Schroders, “US Retirement Survey,” 2021.

 IMPX-20211104-0831

Joseph Keefe

President

Joe is President of Impax Asset Management LLC, the North American division of Impax Asset Management Group and investment adviser to Pax World Funds. Based in the Portsmouth office, he is responsible for US managed strategies as well as distribution of Impax’s full capabilities across North America.

Prior to joining the firm in May 2005, Joe was President of NewCircle Communications, a strategic consulting and communications firm specializing in corporate social responsibility and public policy communications. He served as Senior Advisor for Strategic Social Policy at Calvert Group from 2003-2005 and as Executive Vice President and General Counsel of Citizens Advisers from 1997-2000. He is a former member of the Board of Directors (2000-2006) of US SIF, the trade association representing asset managers and investors engaged in sustainable investing throughout the United States. Before entering the investment management industry, Joe worked in private law practice for 16 years.

Joe holds a Juris Doctor from the University of Virginia School of Law and a Bachelor of Arts in philosophy from the College of the Holy Cross.

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