Biden paves way for ESG retirement funds in reversal from Trump


The Biden administration has proposed a rule that would pave the way for funds pursuing environmental, social and governance standards to be featured in US workers’ retirement savings plans, reversing a Trump-era policy.

In a win for asset managers offering ESG funds, the labour department said on Wednesday that it wanted to remove the “chilling effect” that Donald Trump’s administration imposed on employer retirement plans.

The Trump-era rule, adopted after the 2020 November elections, said a retirement plan’s investment decisions should only be made based on financial factors. The previous US administration raised concerns that ESG funds might make investment decisions with goals unrelated to financial performance.

While ESG funds are not formally prohibited under the current rules, employers rarely offer them because of the potential for lawsuits and regulatory scrutiny. The Department of Labor oversees retirement plans such as 401k funds.

Currently only 2.9 per cent of employer retirement plans offer an ESG or socially responsible fund, the US National Association of Plan Advisors said in January.

State Street and other asset managers opposed the 2020 Trump administration ESG regulation, and Wednesday’s proposal was applauded by groups including TIAA and Natixis.

The Biden proposal “definitely gives [companies] some comfort that the labour department is not going to come after them if they consider ESG factors like climate risk”, said Michael Kreps, a principal at the Groom Law Group.

For asset managers focused on ESG, “it is a definite win”, he added.

ESG investing in the US has boomed in recent years, with a record $21.5bn of cash flowing into sustainable funds in the first three months of this year, according to Morningstar.

“The DoL’s new proposed regulation should dramatically expand the ability for [retirement] plan sponsors to offer funds that focus on or include ESG as investment options for participants,” said Josh Lichtenstein, a partner at the law firm Ropes & Gray.

The new rule “may even create a presumption that plan sponsors should be considering ESG factors as part of all investment decisions”, he said.

The labour department said that retirement savings plans might also be actively required to consider climate change in their investments. A fiduciary duty “may often require an evaluation of the effect of climate change”, the agency said.

The proposal comes ahead of the COP26 climate meeting in Glasgow next month, where President Joe Biden will be under pressure to demonstrate the US is a leader in fighting climate change.

It will be open for public consultation for 60 days.

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