The rise in sustainable and ESG (Environmental, Social, and Governance) investing has skyrocketed in recent years, with sustainable investments growing by 42% among U.S. investors from 2019–2020, according to the U.S. SIF’s 2020 report on sustainable investing practices. That means that sustainable investments represent a third of all U.S. invested funds, or $17.2 trillion. However, despite this rise in sustainable investing, relatively few retirement workplace plans, pensions, or 401k places take sustainable investing principles into account when presenting options to their works.
In 2020, the Department of Labor imposed limits against the consideration of environmental, social and governance factors by workplace retirement plans due to the alleged uncertainty of a changing legal environment and the assumption that ESG investing is a “tie-breaker”.
Recently, a bill was introduced by Senator Tina Smith to amend the Employee Retirement Income Security Act of 1974 to permit retirement plans to consider certain factors in investment decisions. The bill, entitled 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”
The bill would amend the Employee Retirement Income Security Act of 1974 (ERISA) to make clear that investment plans may consider ESG factors in their investment decisions when they are expected to have an impact on investment outcomes — a legal standard that ERISA already applies to non-ESG investment factors. The bill would also amend the ERISA to change the longstanding principle that ESG factors are tie breakers when deciding between otherwise comparable options. The tie-breaker rule existed in DOL guidance or regulation for decades, in varying forms, until being largely repealed by the Department of Labor last year. And finally, the bill would formally repeal last year’s Department of Labor rule on ESG investing, limiting future regulatory actions that impost unfair burdens in an efforts to discourage ESG investing.
This bill has already been endorsed by major organizations, such as US SIF: the Forum for Sustainable and Responsible Investment, Morningstar, the American Retirement Association, SIFMA, CFA Institute, State Street Global Advisors, and Smart USA.
Senator Smith is championing an important issue. Planning for retirement should not be isolated. Younger generations should feel like they have more control over their 401k’s and be able to include ESG factors in their investments if they choose to do so.
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