The debate over consideration of environmental, social and governance (ESG) issues by retirement plans has been raging at least since the Clinton administration. ESG investing allows plan managers to consider factors other than an investment's ability to generate a profit when making investment decisions for plan participants.
The current ESG investing regulation allows pension, retirement and asset managers to invest clients' retirement funds based on political whims and ideals — potentially jeopardizing those funds by failing to give appropriate weight to an investment option's actual profitability.
President Joe Biden has now vetoed Congress' bipartisan attempts to invalidate these "woke" regulations. However, the fight over ESG investing regulations is ongoing and far from over — meaning that advisors and clients should pay close attention to protect themselves.
ESG Background
ESG investing is a term given to investment strategies that consider more than an investment's profitability when making investment decisions. Environmental factors include how a business' operations could affect climate change and preservation of nature. Social factors involve how the business itself treats its employees and customers, as well as the standards to which it holds its suppliers. Governance factors often focus on the business' operations, including executive pay, accounting standards and transparency.
The regulations put into place in 2020 by the Trump-era Labor Department created many roadblocks for retirement plan fiduciaries who wanted to consider these and other ESG factors when making their investment decisions. Plans could have been prohibited from making any investment in companies that focus on ESG factors when selecting "default" investments for plan participants who do not make their own investment elections.
However, in 2021, the Biden administration's Labor Department announced that it would not enforce the 2020 regulations.
Late in 2022, Labor released a new set of regulations on the ESG issue. Those regulations took a neutral approach to ESG investment considerations. Basically, the regulations provided that it was up to the plan fiduciary to determine whether ESG factors were relevant to an investment decision — with the investment's potential financial performance remaining the key driving consideration.
