The Business Climate Finance Initiative (BCF), incubated by Impact Experience, applauds and welcomes the release of the Department of Labor’s Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights, on November 22, 2022. The Final Rule is a significant clarification of the Employee Retirement Income Security Act (ERISA) specifying that fiduciaries, in this case 401(k) or defined benefit plan sponsors, “may 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.”1
As an organization that supports corporations to assess and disclose the climate impacts of corporate cash deposits and retirement plans, as well as to decarbonize those assets, BCF believes that the Final Rule will allow retirement plan sponsors to more proactively account for ESG factors, including climate and carbon-related risks, in the investment menus they offer to 401(k) plan participants.
There are many significant provisions in the Final Rule, including those related to how the consideration of ESG factors may align with fiduciary duties of prudence and loyalty, and how ESG factors may be considered in the application of shareholder rights, including proxy voting.
In addition, the Final Rule removes special, more restrictive rules for a 401(k) plan’s Qualified Default Investment Alternative (QDIA) that were applied in the 2020 rules promulgated by the prior Administration. While the prior rules prohibited the consideration of ESG factors in any investment fund designated the QDIA for a retirement plan, the Final Rule removes those restrictions, meaning that plan sponsors can now potentially offer ESG-oriented target date and other diversified fund options as the default option for new plan participants. Target date funds and other “hybrid” vehicles made up about 27% of all defined contribution plan assets in the first half of 2022,2 so this is a potentially significant opportunity for plan sponsors to prudently address climate change and other ESG considerations.
Finally, the Final Rule explicitly notes that retirement plan participants’ perspectives on investing in ESG and related considerations can be considered by plan fiduciaries in determining plan menu options, potentially paving the way for employees to play an important role in shaping the ESG approaches of the retirement plans they are saving for the future in.
Jenna Nicholas, CEO of Impact Experience, said, “With this wide-ranging and forward-looking Final Rule, the Department of Labor has clearly recognized that considering climate, carbon, justice, equity, diversity, and inclusion (JEDI) and other ESG-related lenses can be well-aligned with prevailing standards of fiduciary duty. In the week following the conclusion of COP27, and the enhanced focus on mitigating future climate impacts and addressing historical injustices that it brought, this Final Rule will serve to unlock billions of dollars of retirement capital towards reaching greater alignment with global climate goals.”News Source: Businesswire