DOL Proposes New Rule on ESG Investing in Retirement Plans

The agency says the proposal seeks to emphasize that climate change and other ESG factors can be financially material and that considering these elements can lead to better long-term risk-adjusted returns.

The U.S. Department of Labor (DOL) has announced a proposed rule that would remove barriers to plan fiduciaries’ ability to consider climate change and other environmental, social and governance (ESG) factors when they select investments and exercise shareholder rights.

The proposed rule is titled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” and stretches to 109 pages. While it will take time for the full scope and potential effects of the proposal to come into view, DOL leadership told reporters on a conference call that their goal is to implement policies to help safeguard the financial security of America’s families by permitting them to confront the challenges of climate change in their retirement plan portfolios.

“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,” said Acting Assistant Secretary for the DOL’s Employee Benefits Security Administration (EBSA) Ali Khawar. “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.”

The comment period on the proposed rule will run for 60 days after publication in the Federal Register and will include instructions on submitting comments through

During the call with reporters, Khawar described the new proposal as a significant change in direction for the EBSA and the DOL. He said the proposal makes it clear that ESG factors are materially financial factors that fiduciary decisionmakers can and should consider in their role as investment stewards for retirement plan participants. Under the proposal, when these fiduciaries are making an initial investment decision or monitoring portfolios, for example, they can treat ESG factors as important factors that are directly related to the risk and reward opportunity at hand, Khawar said.

He said the proposal also affirmatively answers the question of whether ESG-focused investment options can be used as a retirement plan’s qualified default investment alternative (QDIA). In addition, it seeks to address what Khawar called “the anti-proxy voting bias created by the previous administration’s rules.”

The Trump administration “created a bias that really favors fiduciaries not voting and not taking action—but our proposal recognizes that we are talking about assets owned by participants,” Khawar said. “We are making it clear that fiduciaries must think about the financially material best outcome in these situations. It is all about the context of the situation and asking whether voting and shareholder engagement will in fact benefit the participant-investors.”

The new proposal includes specific language about ESG factors—as well as other “collateral benefits” such as social good—serving as a tiebreaker when a fiduciary is selecting between economically indistinguishable investment options. In short, the proposal approves this practice.

Khawar emphasized that the proposal represents a significant endorsement of ESG investing by the Biden administration—but it does not alter retirement plan fiduciaries’ underlying responsibilities of serving their investors prudently and loyally. 

“Please remember that all of these decisions that fiduciaries are making, whether about ESG or other things, must be fundamentally rooted in their statutory obligations,” Khawar said. “Fiduciaries must make prudent decisions and they must be loyal. They need to have a sole focus on what is going to lead to the financial best outcome. What we are doing with our proposal today is confirming our belief that ESG factors and proxy voting, depending on the context, can be justified as financially material.”

As is often the case when the DOL publishes a new proposed rule, PLANADVISER has already received a wealth of comments and commentary on the proposal. Many of them emphasize the need for time to digest and respond to the proposal, but they generally speak warmly about the change in direction signaled by the DOL’s statements and summaries.

“Today’s announcement is an important step toward ending the regulatory pendulum that is holding back the inclusion of funds utilizing ESG criteria in retirement plans and complicating proxy voting by plan fiduciaries,” says Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment. “The proposal recognizes that the consideration of ESG criteria is part of the investment process and should be treated like any other investment criteria used by plan fiduciaries under the duty of loyalty and care. Significantly, the proposal removes the artificial barriers created by the 2020 rules for ESG consideration in default plans. The proposal also recognizes the proxy vote as an ownership right and removes provisions that may have discouraged fiduciaries from exercising their ownership rights. We appreciate the work done by DOL to address the damage done by the previous administration and to ensure that ERISA [Employee Retirement Income Security Act] fiduciaries have new rules for the road.”

Jim Roach, head of distribution for ESG target-date fund (TDF) at Natixis Investment Managers, shared a similar perspective.

“Fiduciaries should consider all the risks when evaluating investments for clients, and ESG is not a replacement for the fundamentals of sound investing, rather an extra layer of evaluation,” he says. “ESG investing is clearly here to stay, and we believe this newly proposed DOL rule addresses a demand of increasing importance to investors.”

U.S. Senator Patty Murray, a Democrat from Washington who is the chair of the Senate Health, Education, Labor, and Pensions (HELP) Committee, also released an early comment. In a joint statement published with fellow HELP Committee member Senator Tina Smith, D-Minnesota, the pair of senators say the proposed rule ensures financial professionals can consider ESG criteria in their investment decisions—for example, whether investments that are financially beneficial also promote racial justice, address climate change or protect human rights.

“Financial security is about planning for the future, so it’s just common sense that ERISA fiduciaries be allowed to consider the environmental, social and governance factors that are shaping the future,” the senators write. “The Biden administration’s step to acknowledge this reality is a win for workers, retirees, investors, businesses, communities, the environment—everyone. This new rule will help build a future for families that is more just, diverse, sustainable and financially secure.”

Murray and Smith were vocal opponents of the Trump-era rules that served to restrict the use of ESG investment strategies. They wrote several letters arguing that the move was at odds with efforts across the country to be more sustainable and to promote diversity and racial equity. They also said the previous rules went against what’s best for workers and retirees, given evidence that ESG investments provide comparable returns and potentially lower risk to traditional funds, and that they have outperformed such traditional investments in the past several years.