US SIF updates ESG guidance ahead of Labor Department proposal

The DOL is on the cusp of unveiling its proposed rules for ESG criteria in retirement plans, leading an industry advocate for sustainable funds to this week update its guidance for employers.

On Tuesday, the US SIF Foundation issued a refreshed version of its five-step guide for defined-contribution plan sponsors, which includes more data about performance of funds that use environmental, social and governance criteria. The guide also has new information about the Department of Labor’s forthcoming regulations, which are expected to effectively reverse rules implemented last year that had a chilling effect on the use of ESG in 401(k)s.

“We’re very much hoping that it will be clear that nothing precludes a fiduciary for including ESG-oriented funds and ERISA plans, and also that proxy voting is permissible in ERISA plans,” Lisa Woll, CEO of US SIF, said in a recent video interview with InvestmentNews. “We also hope that it will make clear that it is OK to include an ESG fund, a fund that considers ESG criteria as a QDIA, or a qualified default investment option.”

Last year’s rule entitled Financial Factors in Selecting Plan Investments limited plan sponsors from using non-pecuniary factors when selecting investment options, and it prohibited ESG-specific funds from being used as the default investment option, such as a target date series, in DC plans. The potential option to use ESG criteria in target dates and other default investment options could significantly expand sustainable funds in 401(k)s, as workers typically end up in those funds automatically.

Earlier this year, the Biden administration announced that it would not enforce the Trump-era rules and would direct the DOL to revisit them.

US SIF’s guide, which is for sponsors that are considering adding ESG investment options to their plans, has five parts: “increasing plan sponsor knowledge of sustainable investing, gauging participants’ interest, discussing implementation, choosing funds and educating participants.”

Money invested in the U.S. using ESG criteria accounted for $17.1 trillion in 2020, representing one third of assets under professional management, largely among institutional clients, according to US SIF.

The DOL submitted its ESG proposed rules to the White House’s Office of Management and Budget in August and could publish the them this month. The regulator would then collect public comment and use that to amend the rules before finalizing them.