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The Biden administration on Tuesday issued a final rule that makes it easier for employers to consider climate change and other so-called environmental, social and governance factors when choosing investment funds for their plans. their 401(k) plan.
US Department of Labor ruleeffective after 60 days, rescinding regulations introduced under the Trump administration.
The previous rules, enacted in 2020, has a “chilling” effect that effectively keeps recruiters out from considering ESG factors when choosing a 401(k) fund, senior Labor Department officials said at a news conference Tuesday.
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ESG investing is also known as sustainability investing or impact investing. Have many flavors of ESG funds; For example, they can move investor funds into wind and solar companies or those with diversified board members, or move money out of fossil fuel related companies. jelly.
ESG funds have become more popular in recent years. According to Morningstar, investors poured $69.2 billion into them in 2021, an annual record. Accepting a 401(k) plan was slowhowever.
The Inflation Reduction Act is expected to further boost the popularity of ESG investment. The bill that President Joe Biden signed in August represents largest federal investment to combat climate change in American history.
What Biden’s New ESG Rule Do
Employers are legally obligated to carefully evaluate the risk and return of the fund when selecting investments under a 401(k); for example, they cannot downplay the financial interests of workers in favor of a cause like climate change.
The new ESG rules do not change these duties.
They do, however, clarify that businesses may “include economic impact of climate change and other ESG considerations” when making investment choices – what Lisa Gomez, assistant secretary of labor for the Employee Welfare Security Administration, calls “common sense”.
“While climate change is an important issue, it is not [just] what this rule is about,” Gomez said.
Employers are also not violating their legal obligations by taking employees’ ESG interests into account when listing 401(k) investment funds, under the new rule; that could lead to more worker participation and therefore more retirement security, it said.
The action of the Biden administration on Tuesday after a March 2021 directive that it won’t enforce Trump-era rules. The government after that offer amend those rules by October 2021; Tuesday’s action updates that proposal according to comments received from the public.
Biden’s new regulations remove some elements of Trump-era rules that Labor Department officials said prevented employers from using ESG funds.
For example, the previous rules did not explicitly mention ESG, and they required employers to select investments based solely on “monetary” factors – a term that essentially disallows employees from Employers select funds with any kind of “ethical” component, Labor Department officials said.
Biden’s new governing rules remove that requirement.
“Whether E, S or G, … direct or indirect, large or small, [ESG] an element that also fosters a moral component,” said a senior Labor Department official, who only provided background conditions. “ESGs have an inherent dual purpose.”
The new rules also remove a restriction that prevents employers from using ESG funds as the default option for workers to automatically enroll in their 401(k) plan — a boulevard is more and more popular to enhance retirement security. In legal parlance, these funds are known as “qualified defined investment options” or QDIA.
