We didn't think the rule as originally proposed would have marked a big change from previous guidance, but its requirements—and a lack of clarity on classifications—might have added a burden to plan sponsors plates when selecting and monitoring ESG options.

As we stated in our comments to the DOL, the rule failed to 'define what constitutes an 'ESG fund,' which could potentially cause a negative effect on DC plan sponsors selecting funds as a general matter and including those that incorporate ESG risk factors."

Among the messages in the 8,000-plus letters to the DOL during the 30-day comment window? ESG can't be separated from financial factors. In the words of another response to the DOL that included AB, "ESG integration within the portfolio management process is not driven by ideological considerations. Instead, ESG is integrated within investment portfolios to improve the client's risk/reward profile—often by eliminating unnecessary risk."

The DOL's final rule seemed to acknowledge the concerns. It omitted any reference to strategies with an ESG theme in ERISA plans. No longer specific to ESG, the new rule essentially states that fiduciaries must select investments based only on financial (or, in the DOL's terminology, "pecuniary") factors.

Completing the puzzle: ESG factors are financial factors

The focus on financial factors is good news, because as we see it, ESG considerations are a critical part of in-depth fundamental research in any investment solution—whether it has an ESG label or not.

Any number of examples highlight why integrating ESG in analysis matters. For one thing, many studies link strong company culture and governance to long-term financial success—simply put, well-run companies that treat their employees well are better positioned than their peers.

Heavy carbon emitters face growing carbon taxes and looming regulation. Intensifying climate change will fuel severe storms and disasters that may impair firms' physical assets or disrupt their supply chains. And businesses committed to caring for employees and making a positive social impact are better positioned to attract the best talent and build customer loyalty.

In short, ESG considerations are financial considerations. Ignoring ESG factors leaves the investment puzzle incomplete and could lead to less-than-optimal results.

What does the (regulatory) future hold for ESG in DC?

ESG investments will continue to proliferate and evolve, and so will the regulatory framework that governs their inclusion in ERISA plans. Simply put, the ESG playing field in the retirement arena are always subject to revision.

In fact, more change is already afoot in Washington DC, with Democrat Joe Biden the president-elect—though Senate control won't be determined until January runoff elections in Georgia. The Biden administration is expected to take a fresh look at regulations focusing on ESG considerations. It may modify the DOL rules to again include strategies focusing on non-financial factors—with an eye toward encouraging greater consideration of ESG options.

Other legislation is being shopped in Congress that—if passed—could tilt the playing field further in favor of DC plans adopting ESG investments. Michigan Democratic Representative Andy Levin plans to introduce two bills that would require retirement plan fiduciaries and financial advisors to consider ESG factors when making investment decisions.

Included in the requirements: Plan fiduciaries and financial advisors would have to disclose their investment policies on ESG to the Securities and Exchange Commission—even if they don't end up selecting those types of investments. The expressed goal of the legislation is to support sustainable investing for workers, helping them understand plan investments and "invest their values."

Legislative efforts like these would bring the treatment of ESG investments in the US retirement space more in line with established practices in the UK and Europe.

The big picture

By most accounts, the regulatory and legislative landscape seems to be growing more conducive for ESG investing. This evolving trend gives plan sponsors more support in responding to participant's demands for ESG considerations in plan menus. While the political weather is always changeable, the prevailing wind does seem to favor more ESG advocacy ahead.

That's a positive for DC plan sponsors and participants: when the bottom line is better financial outcomes, plans can and should apply an ESG integration lens across their investment lineups.

This is true even for solutions that don't have ESG in their title—because ESG considerations are financial considerations. A good first step? Take a long, hard look at all plan investment options and question whether all factors are being considered in the investment process.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time.

Jennifer DeLong is Head of Defined Contribution at AllianceBernstein, and Michelle Dunstan is Global Head of Responsible Investing at AllianceBernstein.