The Ministry of Labor will propose changes to the rules on Wednesday which would make it easier for pension plans to add investment options based on environmental and social considerations - and allow those options to be added.'be the default setting for registrants.
In a reversal of Trump-era policy, the Biden administration's proposal makes it clear that not only are pension plan administrators allowed to take environmental and social factors into account, it may be their duty to do so - especially as the economic consequences of climate change continue to grow. 'appear.
Martin J. Walsh, the Secretary of Labor, said the department had consulted with consumer groups, asset managers and 'others. before writing the proposed rule, and that the change was considered necessary as the old one seemed to have a 'chilling effect' on the use of environmental, social and governance factors when appraising investments .
"If theselegal issues kept the trustees away, this could lead to worse consequences for workers and retirees, "Mr. Walsh said in an interview.
The new regulations would also allow environmental and other funds to become the pension investment option like 401 (k) s, that the rules of the previous administration had banned. But the rule would not allow plan supervisors to sacrifice returns or take greater risks when analyzing potential investments with a focus on environmental, social and governance factors, known as of ESG, Ministry of Labor officials said.
Under the Employees Retirement Income Security Act of 1974, known as ERISA, pension plan administrators must act only in the best interests of plan members. Investments focused on the environment, social and governance have been allowed, but only if they are supposed to work at least as well as alternatives which take similar levels of risk.
This has come to be known as a "tiebreaker" or "all other things being equal", a guiding principle that has effectively remained the same across the Republican and Democratic administrations , although they interpreted it differently.
The proposed change indicates that plan managers are allowed to consider ESG factors in their initial analysis of investments rather than at the very end - a change which, according toMinistry of Labor officials still maintain this principle, as managers are still not allowed to sacrifice returns for this type of fringe benefit.
For example, the proposed rule says that taking climate change into account, "such as assessing the financial risks of investments for which government climate policies will affect performance" can benefit pension portfolios by mitigating longer-term risks. .
"If an ESG factor is important for risk-return analysis, it is something that we think trustees should take into account ", Al i Khawar, Acting Assistant Secretary in the department , said in an interview. "Thathas a different weight than it was five, 10 or 15 years ago, "he said, given the increase in data quantifying the risks of ignoring ESG and the benefits to take them into account.
The investment category has grown considerably in recent years. Total assets in ESG funds reached 17,100 billion dollars at the start of 2020, up 42% from the start of 2018, according to the U.S. SIF, a nonprofit focused on sustainable investing. This total investment represents one in three dollars under professional management.
Only a small fraction of these investments are held by pension plan investors, according to a report by the US SIF, even as the Interest is increasing, especially among young investors.
The Biden administration has also proposedchanges that would overturn another Trump-era rule, which required pension plan administrators to consider a complex list of principles before voting by proxy on shareholder proposals, which may have discouraged plans altogether to vote. If the trustees decide to vote and the rule says it is not required, they should only support causes and goals in the financial interest of the plan.
The proposal would remove that language, Ministry of Labor officials said, and largely allow plan trustees to decide when" it is or is not appropriate to act, "Khawar said. .
The Biden administration had already signaled its plans: just two months after the Trump-era rules came into effect in January, the Biden administration said it would not enforce them andthat a new proposal would be forthcoming.
Sta Shareholders will have 60 days after the proposal is posted in the Federal Register to comment. A final rule is usually issued after the ministry has reviewed the comments.