Biden Rule Lets Retirement Plan Admin Invest Client Money in ESG—Even if Not Most Profitable

January 31st, 2023 12:21 PM

A new Biden Administration rule took effect Monday, allowing retirement plan administrators (fiduciaries) to base investments on Environmental, Social and Governance (ESG) goals, rather than only on the maximum financial benefit of their clients.

The U.S. Department of Labor released the final rule under the Employee Retirement Income Security Act (ERISA) to allow plan fiduciaries to consider climate change and other environmental, social, and governance (ESG) factors when they make investment decisions and when they exercise shareholder rights, including voting on shareholder resolutions and board nominations.

The Biden rule eliminates a 2020 Trump Administration rule requirement that fiduciaries consider only the monetary benefit (“pecuniary only”) to their clients when choosing investments.

The new rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” which now allows retirement account managers to commit their clients’ money to less-profitable ESG investments, argues that the Trump rule had unfairly discouraged investment in ESG.

It also argues that, by investing in ESG, climate disasters may be prevented, thus providing a form of financial benefit to clients:

“[R]isk and return factors may include the economic effects of climate change and other environmental, social, or governance factors on the particular investment or investment course of action.”

Money managers may now consider both “potential,” as well as “real,” effects of climate change when choosing retirement account investments:

“[S]uch factors may include: (i) climate change-related factors, such as a corporation's exposure to the real and potential economic effects of climate change, including exposure to the physical and transitional risks of climate change and the positive or negative effects of government regulations and policies related to climate change.”

“A fiduciary also may make a similar determination with respect to governance factors,” the Biden rule says.

Additionally, the final rule eliminates some of the monitoring, documentation and reporting requirements of the 2020 Trump Administration rule.

The review of the 2020 rule, and the subsequent changes, were predicated on two executive orders issued by President Joe Biden requiring government agencies to review their policies and revise them to align with the administration's climate goals.

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