DOL headquarters in Washington DOL headquarters in Washington. (Photo: Mike Scarcella/ALM)

The Department of Labor has proposed a new rule for pension plans operating under ERISA that would limit ESG-focused investments.

A notice of the proposed rule notes that “recent trends involving ESG investing … may lead ERISA plan fiduciaries to choose investments or investment courses of action to promote environmental, social, and public policy goals unrelated to the interests of plan participants and beneficiaries in financial benefits from the plan and expose plan participants and beneficiaries to inappropriate investment risks.”

The new proposal is designed in part to to clarify “that ERISA plan fiduciaries may not invest in ESG vehicles when they understand [its] investment strategy … is to subordinate return or increase risk for the purpose of non-financial objectives,” the DOL press release states.

In that same release, DOL Secretary Eugene Scalia said, “Private employer-sponsored retirement plans are not vehicles for furthering social goals or policy objectives that are not in the financial interest of the plan” but rather should be focused on “the very important social goal [of] providing for the retirement security of American workers.”

The latest DOL proposal reverses earlier guidance promulgated by the agency during the Obama Administration that allowed retirement plans operating under ERISA to consider the social impact of their investments so long as those investments didn’t compromise fiduciary obligations. It is subject to a 30-day period of public comment.

(Related: DOL Clears Way for Impact Investing in Retirement Plans)

The DOL proposal acknowledges that ESG factors can have a material financial impact on investments but requires plan fiduciaries to document through “proper analysis and evaluation” the inclusion of alternative investment options chosen in part on the basis of a non-monetary factor — the agency uses the term “non-pecuniary factor.”

The proposal includes several other additions to current regulations, among them the requirement that 401(k) plans meet certain requirements when including ESG-related objectives in their investment mandates or funds with ESG in their names. 

The proposed rule would force some retirement plans to change their processes for selecting and monitoring investments, which could impose additional costs, according to the DOL.

The Chamber of Commerce applauded the DOL proposal as “making investor return the central focus for workers’ pensions and employee retirement accounts,” according to a statement by Tom Quaadman, executive vice president for the chamber’s Center for Capital Markets Competitiveness.

The Principles for Responsible Investment (PRI), which is proponent of responsible investment and represents 3,000 investors with more than $100 trillion in assets, opposes it. The new DOL proposed rule would create more risk to investors because material ESG factors such as climate change “will have a material impact on our economy and on asset prices, said PRI CEO Fiona Reynolds, in a statement.

Many asset managers such as BlackRock, State Street and Nuveen share that view and recent analysis by Morningstar and S&P Global Market Intelligence, among others, have shown that sustainable mutual funds and ETFs  have outperformed traditional investments this year.

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