con U.S. Department of Labor in Washington, D.C. (Photo: Diego M. Radzinschi/ALM)
If the private sector has discovered a good idea it's likely the public sector is not far behind in following suit. Last October, the US Department of Labor announced a proposed rule called the Prudence and Loyalty in Selecting Plan Investments and Existing Shareholder Rights.
Essentially it addresses the inclusion of environmental, social and governance (ESG) criteria and proxy voting considerations for ERISA-governed retirement plans. ESG has already been a consideration of many investment firms and pension plans but the trend is moving its way through government towards a more institutionalized consideration.
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After accepting comments from more than 22,000 individuals, 97% supported the DOL reversing the 2020 rules clarifying that the use of ESG criteria in investment selection and proxy voting is consistent with fiduciary obligations under ERISA. (See the USSIF.org paper analyzing comments sent to DOL during comment period.)
The two rules being revised are the Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.
There were also 144 institutional comments. Four comments were submitted by corporations, 53 by asset managers or other financial firms, and 87 were submitted by advocates. The majority – 83% – of these participants supported the proposed rule.
"We also appreciate that the Department proposes to remove the 2020 Rule's restriction on qualified default investment alternatives (QDIA)… We agree with the Department's conclusion that if a fiduciary selects an investment option in accordance with the duties of prudence and loyalty as described in the Proposed Rule, and the investment meets the protective standards set out in the Department's QDIA regulation, there is no reason to foreclose plan fiduciaries from considering the fund as a QDIA simply because it expressly considers climate change or other ESG factors," noted the Investment Company Institute.
Commenters argued that most asset managers already recognize that climate and other ESG factors belong in their financial analysis alongside other relevant information. Many applauded the proposed rule's acknowledgment that ESG factors "are no different than other 'traditional' material risk-return factors" and welcomed a reversal of the 2020 rules' framing.
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