Final ESG Regulation Published in the Federal Register

The highly anticipated final ruling from the DOL regarding its consideration of environmental, social and governance (ESG) factors within sponsored retirement plans has finally been unveiled and formally published in the Federal Register. In short, the final ruling gives plan fiduciaries the option to consider climate change and other environmental, social and governance factors when they select retirement plan investments.

An interesting, new provision has been included stating that fiduciaries “do not violate their duty of loyalty solely because they take participants” preference into account when constructing a menu of prudent investment options for participant-directed individual account plans. If accommodating participants’ preferences will lead to greater participation and higher deferral rates, then it could lead to greater retirement security.” In other words, if fiduciaries believe adding ESG options to the menu will benefit the plan with increased participation then they are free to make that decision. While we certainly agree with this outlook, it’s important to note that the overall pool of participants should be factored in when making these decisions, not just a small subset.

It’s also important to note that the DOL continues to focus on a key principle surrounding ESG investing: The duties of prudence and loyalty require ERISA plan fiduciaries to focus on risk-return factors and not disregard the interests of participants and beneficiaries (avoid sacrificing investment returns or taking on additional investment risk).  We recommend that fiduciaries continue to follow a prudent, documented process when reviewing and adding investments to their menu. All factors should be considered (performance, philosophy, risk return, etc.) before moving forward with an ESG option. Just because an investment may be considered environmentally, social and governance does not automatically qualify it as a prudent option for your plan menu.

There has been a fair amount of controversy surrounding the ESG discussions since the SEC initially proposed climate-related disclosure rules in March of 2022 and then was shortly followed with proposed amendments in May. Some industry leaders believe too much attention is being spent on the ESG movement while others are “all in” on ESG.

The recent asset trends say the popularity is growing, and at an impressive rate. Global ESG assets are expected to surpass $41 trillion by 2022 and $50 trillion by the end of 2025, making it one-third of the projected total assets under management globally, according to a new report by Bloomberg Intelligence (BI).

When it comes to retirement plans the progress has been a lot slower, but still noteworthy. According to Morningstar’s “Sustainable Funds U.S. Landscape Report” for 2021 assets in sustainable funds hit a record $357 billion, more than 4 times the total three years ago.” The slow progress is most likely contributed to the pending ESG regulation.  We’ll keep an eye on those trends in the future now that the regulation has been finalized.

Conrad Siegel will continue to view and research ESG options like we have done in the past. ESG investment options, if added, will be subject to the same investment criteria that the other investment options are compared to on an ongoing basis.  In addition, the underlying characteristics of any ESG investment option will be reviewed annually to confirm that the option continues to integrate the three ESG factors into its fundamental investment analysis.

If you have any questions regarding the new ESG Regs please feel free to reach out to your investment consultant.

Sources: trillion-assets-in-2022-but-not- without-challenges-finds-bloomberg-intelligence/ fiduciaries-may-not-must- consider-esg-dol