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.”

Smith states in a summary of the bill that “despite considerable demand for sustainable investment options, relatively few workplace retirement plans, such as pensions and 401(k) plans, take sustainable investing principles into account in their investment decisions or provide sustainable investment options to workers.”

One of the primary issues hindering plans that want to offer sustainable investment options “is an uncertain and regularly changing legal environment,” Smith said.

Sustainable investing “was further discouraged by a 2020 Department of Labor rule that imposed new limits on the consideration of environmental, social, and governance (ESG) factors by workplace retirement plans,” Smith continued.

Labor Secretary Marty Walsh said on March 10 that Labor will abandon two rules adopted under the Trump administration that would have made it more difficult for retirement plans to consider ESG factors in their investment options and in their proxy votes.

Smith’s bill would “formally repeal” the Trump-era rule on ESG investing.

The Financial Factors in Selecting Retirement Plan Investment Act “seeks to provide legal certainty to plans that choose to consider ESG factors in their investment decisions or offer ESG investment options to plan participants,” Smith said.