The U.S. Department of Labor (DOL) announced today a new set of proposals aimed at removing barriers to ESG investing in private employer-sponsored retirement plans (ERISA) by enabling pension managers to consider climate change and other ESG factors in their selection of investments. Additionally, the DOL proposals open the door to fund managers to participate more actively in proxy voting.

The new proposals would make it significantly easier for fund managers to incorporate climate and ESG risks as part of their overall investment considerations, recognizing that these risks can be financially material. According to the proposal, “if a fiduciary prudently concludes climate change and other ESG factors are material to an investment or investment course of action under consideration, the fiduciary can and should consider them and act accordingly, as would be the case with respect to any material risk-return factor.”

The proposed rules would mark a major reversal of rules put in place by the Trump administration. In June 2020, the DOL announced a proposed rule that effectively would put strict limits on ESG investing in ERISA plans. Despite significant pushback from investors and other sustainability-focused groups blasting the proposal as outdated and counterproductive, it was finalized by the DOL in November. In a further blow to ESG-focused investors, the DOL also issued rules regarding proxy voting, impacting the ability of investment managers to promote sustainability goals through their investments, and suggesting that proxy voting on ESG issues is not in the interests of investors.

In May 2021, President Biden signed an executive order directing federal government agencies to implement policies to act to mitigate climate-related financial risk and help safeguard investors’ savings and pensions from these risks. The order directed the Department of Labor to consider reversing Trump-era rules that are broadly viewed as obstacles to ESG investing.

Acting Assistant Secretary for the Employee Benefits Security Administration Ali Khawar, said:

“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. A principal idea underlying the proposal is that climate change and other ESG factors can be financially material and when they are, considering them will inevitably lead to better long-term risk-adjusted returns, protecting the retirement savings of America’s workers.”

On the voting front, the new proposals assert that proxy voting by managers “are a crucial lever in ensuring that shareholders’ interests, as the company’s owners, are protected,” and encourages fiduciaries to take their rights as shareholders seriously and to exercise those rights to protect the interests of plan participants.  The proposals also set out a clearer set of rules in order to enable fiduciaries to be in compliance with their duties when making decisions on the exercise of shareholder rights and proxy voting.

The new proposals were broadly welcomed by sustainability-focused investment organizations.

In a statement issued after the release of the new proposals ISS President & CEO, Gary Retelny said:

“ISS welcomes today’s announcement by the U.S. Department of Labor to propose rule amendments that remove unnecessary burdens on the selection of ESG investments and confirm that climate risk and other ESG factors may appropriately be considered under the fiduciary duty of prudence. We similarly applaud the DOL’s decision to propose rule amendments reaffirming the applicability of the fiduciary duties of prudence and loyalty to proxy voting, and removing language in the 2020 rules that could be read to suggest that fiduciaries should be indifferent to the exercise of shareholder rights.”

Steven M. Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets at the sustainability nonprofit Ceres, commented:

“Climate change poses an imminent material financial risk that fiduciaries must consider in selecting retirement investments. Many of the largest and most sophisticated investors around the world have already integrated climate risk into their investment processes. The numbers show that employees want to invest their retirement savings sustainably. This proposed rule, if adopted, will ensure that fiduciaries can incorporate climate risk into their investment decisions when in the best interest of the plan’s beneficiaries.”