The U.S. Government Accountability Office reports that despite the growing popularity of ESG factors in investments, few retirement funds in the U.S., unlike Europe, incorporate those factors in their holdings.
One reason for this, according to the GAO, is the lack of clear guidance from the Labor Department. For example, Labor hasn’t addressed whether defined contribution plans can incorporate ESG factors in their qualified default investment alternatives and still qualify for certain legal protections under the Employee Retirement Income Security Act.
The DOL, under President Barack Obama and then-Labor Secretary Tom Perez, issued guidance that ESG-focused investments in private-sector retirement plans in 2015 and 2016 are consistent with their fiduciary responsibilities under ERISA, but the GAO says that in addition to the QDIA questions, Labor didn’t distinguish between ESG use by defined benefit plans and defined contribution plans.
New guidance issued under the Trump administration is far more restrictive. It says that investments based on ESG factors are not always the “prudent choice” for retirement accounts or economically relevant, and ”ERISA fiduciaries must always put first the economic interests of the plan in providing retirement benefits.” The latter could lead some fiduciaries to avoid considering even those ESG factors that address material investment risks to the detriment of plan participants’ best interests, according to the GAO report.
The latest Labor guidance was actually developed while the department was reviewing the GAO report that was released this week. The guidance focuses on the use of ESG factors in QDIAs for collateral benefits — not investment benefits — rather than for their material impact on financial performance, according to the GAO.
The GAO is now recommending that the assistant secretary of Labor for the Employee Benefits Security Administration, which oversees retirement plans, do two things:
- Clarify whether an ERISA retirement plan may incorporate material ESG factors into the investment manage for a QDIA
- Provide additional information to assist fiduciaries in evaluating whether ESG factors are material to an investment’s financial performance and, if they are, how to address those material risks.
Labor neither endorsed nor refuted those recommendations and appeared in no rush to change course. Preston Rutledge, the assistant secretary at EBSA, responded that the department first wants to evaluate the public reaction to the GAO report and its own recent guidance on ESG investing in retirement plans “before reaching any conclusions about the necessity or appropriateness of issuing further guidance in this area.”
The GAO report was issued in response to a request from three Democratic lawmakers: Sen. Brian Schatz of Hawaii, Rep. Gerald Connolly of Virginia and Rep. James Langevin of Rhode Island.
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