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.