Democrats in the Senate and House introduced a bill Thursday that would amend ERISA to make clear that retirement plans may consider ESG factors in their investment decisions and that ESG investments are permitted as qualified default investment alternatives in ERISA-covered plans.
Under the bill — the Financial Factors in Selecting Retirement Plan Investment Act, sponsored by Sens. Tina Smith, D-Minn., and Patty Murray, D-Wash., and Rep. Suzan DelBene, D-Wash. — plans would have to consider ESG factors in a prudent manner consistent with their fiduciary obligations, the same legal standard that ERISA already applies to non-ESG investment factors.
“Sustainable investment options are good for retirees and good for our environment — that’s a win-win,” said Ms. Smith in a news release. “We’re putting forth this legislation because we know there’s a growing demand for sustainable investing, and because we believe Congress should act now to provide the legal certainty necessary to make sure workplace retirement plans are able to offer these options to workers across the country.”
The bill would also amend ERISA to make clear that plans can consider ESG factors as tiebreakers when deciding between otherwise comparable options.
Moreover, the bill would repeal a Department of Labor rule promulgated under the Trump administration that stipulated that ERISA plan fiduciaries cannot invest in “non-pecuniary” vehicles that sacrifice investment returns or take on additional risk. That rule — called “Financial Factors in Selecting Plan Investments”— took effect in January, but the Biden administration in March said it would not enforce the rule.
It’s often referred to as the “ESG rule” because the initial proposal, which was unveiled in June, focused on environmental, social and governance investment factors, but the final rule walked back the ESG language.
Backers of the bill include US SIF: The Forum for Sustainable and Responsible Investment, Morningstar, the American Retirement Association, the Securities Industry and Financial Markets Association, the CFA Institute and State Street Global Advisors, according to a fact sheet.
“ESG factors should continue to be valid considerations for investment decisions — including for qualified default investment alternatives and their components — so long as they are evaluated in a manner consistent with a prudent process,” Kenneth E. Bentsen Jr., SIFMA president and CEO, said in a statement.
Clarifying that ESG criteria may be considered in QDIAs is crucial, Lisa Woll, CEO of US SIF, said in a statement. “Without this clarification, plan fiduciaries may remain reluctant to offer sustainable investment products in default options due to concerns about regulatory and litigation risks,” she said. “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.”