Bill Would Allow ESG Criteria, Investments in Retirement Plans

Sen. Tina Smith, D-Minn., introduced legislation Thursday that would allow environmental, social and governance (ESG) criteria to be considered in ERISA-governed retirement plans.

The bill, the Financial Factors in Selecting Retirement Plan Investments Act, is co-sponsored by Sen. Patty Murray, D-Wash., chairwoman of the Senate Health Education Labor & Pensions Committee.

The bill would allow a plan fiduciary to consider ESG or similar factors, in connection with carrying out an investment decision, strategy or objective, or other fiduciary act; and consider collateral ESG or similar factors as tie-breakers when competing investments can reasonably be expected to serve the plan’s economic interests equally well with respect to expected return and risk over the appropriate time horizon.

Lisa Woll, CEO of the Forum for Sustainable and Responsible Investment, said Thursday in a statement that “investors consider ESG criteria because they are material to financial performance.”

Smith’s legislation, she continued, “ensures the Department of Labor will treat the use of ESG criteria for assessing potential performance the same as it treats traditional GAAP-reported financial information. Both affect financial performance.”

The bill also “clarifies that ESG criteria may be considered in qualified default investment alternatives,” Woll said.

“Without this clarification, plan fiduciaries may remain reluctant to offer sustainable investment products in default options due to concerns about regulatory and litigation risks,” Woll added. “In fact, it is prudent for QDIA investments to consider long-term threats like climate change to protect the long-term interests of plan participants.”