Bicameral Bill Would Provide Legal Certainty to Plans Considering Environmental, Social & Governance (ESG) Factors

WASHINGTON, D.C. [5/20/21]—Today, U.S. Senators Tina Smith (D-Minn.) and Patty Murray (D-Wash.) and U.S. Representative Suzan DelBene (D-WA 1) introduced legislation in the Senate and House to provide legal certainty to workplace retirement plans that choose to consider environmental, social and governance (ESG) factors in their investment decisions or offer ESG investment options.

Despite considerable demand for sustainable investment options, relatively few workplace retirement plans, such as pensions and 401(k) plans, take sustainable investing principles into account in their investment decisions or provide sustainable investment options to workers. One of the primary issues hindering plans that want to offer sustainable investment options is an uncertain and regularly changing legal environment. Sustainable investing was further discouraged by a Department of Labor (DOL) rule under former President Trump that imposed new limits on the consideration of ESG factors by workplace retirement plans. 

With their Financial Factors in Selecting Retirement Plan Investment Act, Sens. Smith, Murray and Rep. DelBene want Congress to provide the legal certainty needed to reverse course and promote sustainable plans.

“Sustainable investment options are good for retirees and good for our environment—that’s a win-win,” said Sen. Smith, a member of the Senate Banking Committee. “We’re putting forth this legislation because we know there’s a growing demand for sustainable investing, and because we believe Congress should act now to provide the legal certainty necessary to make sure workplace retirement plans are able to offer these options to workers across the country.”

“Americans deserve a secure retirement and ESG investments are a key component in accomplishing that goal,” said Congresswoman DelBene. “This bill promises retirees a pathway not only to reach that secure retirement but a pathway to live in a world worth retiring in."

“Retirement security is all about planning for the future—and you can’t truly do that if you aren’t able to consider the environmental, social, and governance factors that will shape the future. Allowing this approach isn’t just common sense, it’s a win for workers, retirees, investors, businesses, communities, the environment, and more,” said Sen. Murray, chair of the Senate Health, Education, Labor, and Pensions Committee. “That’s why Senator Smith, Congresswoman DelBene, and I are introducing legislation to make sure people are able to invest in a future that’s not only more financially secure for their family, but more just, diverse, and sustainable for everyone.”

What Supporting Organizations Say About the Bill

“SIFMA believes it is important for financial institutions to be able to consider all factors, including ESG factors, as part of an investment and risk management strategy. ESG factors should continue to be valid considerations for investment decisions – including for qualified default investment alternatives (QDIAs) and their components – so long as they are evaluated in a manner consistent with a prudent process. We strongly believe the focus should be on the prudence of the analysis, as opposed to the particulars of the investments. SIFMA commends Chair Murray and Senator Smith for their engagement on this important issue and look forward to working with the committee towards final passage,” said SIFMA President and CEO Kenneth E. Bentsen Jr.

“The bill makes clear that environmental, social and governance (ESG) criteria may be considered in ERISA-governed retirement plans and will end the policy pendulum of regulatory interpretations on this issue at the Department of Labor (DOL),” said Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment.

“ESG risk analysis is an important part of prudent investing. We support the Financial Factors in Selecting Retirement Plan Investments Act because it would help mainstream the use of this analysis as part of retirement plan investment selection, benefiting participants,” said Aron Szapiro, Head of Policy Research at Morningstar, Inc.

“Retirement plan sponsors and participants deserve the freedom to choose the 401(k) investments that best suits their needs.  This legislation allows the ESG investments to be included on a 401(k) menu consistent with a normal fiduciary process without artificial and unnecessary barriers that are inconsistent with fundamental principles of ERISA,” said Brian Graff, Chief Executive Officer of the American Retirement Association.

“CFA Institute is pleased to support the Financial Factors in Selecting Retirement Plan Investments Act. Integration of all material factors, including material ESG factors is an important part of the analytical and investment decision-making process, regardless of investment style, asset class, or investment approach; and one that extends to the exercise of shareholder rights and proxy voting. The legislation helps to address the confusion created by one of the Department of Labor rules (RIN 1210–AB95) finalized last year and clarifies that integrating ESG factors in the financial evaluation and management of plan investments can be consistent with ERISA fiduciary obligations.” said Kurt Schacht, Head of Advocacy, Americas, CFA Institute.

“The Financial Factors in Selecting Retirement Plan Investments Act proposal would require fiduciaries to primarily consider investment returns, but also allow them to incorporate ESG factors both as a source of potential investment returns and as a tie-breaker when deciding between two otherwise equivalent investments. We believe this is an appropriate framework, as it allows fiduciaries to incorporate ESG factors into their investment decisions, including those that apply to the qualified default investment alternative (QDIA), while still prioritizing the obligation of fiduciaries to seek investment returns for beneficiaries,” said Catherine Reilly, Director of Retirement Solutions at Smart.

You can access a letter of support from State Street Global Advisors here, a summary of the bill here and text of the bill here.

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