As Labor reviews ESG rule, study says many 401(k)s don’t reflect sustainability pledges

Lawmakers urge Walsh to repeal Trump administration rule

Labor Secretary Marty Walsh is reviewing a Trump administration rule that said certain pension funds must make financial performance the main reason for investment decisions.  (Tom Williams/CQ Roll Call)
Labor Secretary Marty Walsh is reviewing a Trump administration rule that said certain pension funds must make financial performance the main reason for investment decisions. (Tom Williams/CQ Roll Call)
Posted August 5, 2021 at 7:00am

Corrected Aug. 6, Aug. 9 | As House Democrats step up pressure on Labor Secretary Marty Walsh to clarify use of environmental, social, and governance-minded investing in employer-sponsored retirement plans such as 401(k)s, a study found that plan investments often fail to align with their sustainability commitments.

Last year, the Trump administration adopted rules that instructed fiduciaries of retirement plans overseen by the Labor Department to focus investment strategies on “pecuniary factors” and imposed similar obligations on proxy voting in connection with plan investments. Though the rules didn’t completely foreclose ESG strategies, they elevated financial performance to the main focus and led many plan administrators to simply avoid ESG options altogether.

After Walsh took over as Labor secretary in the Biden administration, he said the department wouldn’t enforce that rule. More than a dozen House Democrats told Walsh in a July 29 letter that quashing the rule wasn't enough. Affirmative rule-making will also be necessary to support ESG investing in plans governed by a law known as the Employee Retirement Income Security Act of 1974, the federal tax and labor law that established minimum standards for pension plans in the private sector, they said.

“While ending that rule’s enforcement is a necessary first step, we feel it is just that — a first step,” the lawmakers wrote. “A new rule is essential to eliminate the aforementioned chilling effect and allow plan fiduciaries to incorporate ESG factors into their investment strategies without fear of legal consequences.”

The lawmakers asked Walsh to confirm rule-making efforts are underway but they didn't provide a deadline for a response. A spokesperson said the department is reviewing the letter and also confirmed rule-making on ESG investing is underway in accordance with President Joe Biden's May executive order that directed departments to consider climate-related financial risk.

Reps. Andy Levin of Michigan and Suzan DelBene of Washington, who were among the Democrats behind the letter, have also both proposed bills this session aimed at expanding ESG options in retirement plans.

DelBene sponsored a bill that would amend ERISA to expressly allow ESG strategies and allow them to serve as default options. Levin introduced a bill that would allow ERISA plan fiduciaries to consider ESG factors and would encourage, but not require, plans to adopt a written sustainable investment policy.

As most Americans hold stocks only through their retirement portfolios, ESG growth in that sector could rapidly propel an already existing movement.

“ESG investing is growing at a tremendous rate,” the lawmakers told Walsh in the letter. "In 2020 alone, $51.1 billion in net investments went into sustainable funds, nearly double the previous annual record."

"Laws and regulations need to match this interest" in ESG, Levin said in an email. "We must make it easier to invest sustainably — workers want it, and our planet needs it." 

ESG as default investment

Levin's proposal would also allow ESG-focused funds to serve as default options within a plan in certain cases, which could make a difference for millions of workers who don't make active selections on plan investing. He and his colleagues argued that sustainable investment strategies can pay off financially in the long run.

“Workers do not have to make a trade-off between getting a return on their investments and their principles, and the rules and regulations governing pension investments should not force them to,” the lawmakers wrote. “Instead, those rules should provide clarity so that sustainable investing is not burdensome.”

That may have been the case at Amazon.com Inc. and Comcast Corp. Both made commitments to promote environmental sustainability as well as greater diversity, equity and inclusion. Still, more than half of their employees’ 401(k) plan assets are in default options, such as target date funds that don’t normally consider sustainability factors, with large amounts invested in fossil fuels, weapons manufacturing or private prisons, according to a July 27 report from activist investor advocacy group As You Sow.

As You Sow, which graded Comcast and Amazon from "poor" to "fair" across several categories of sustainability and social impact, said investors need to take into account the economic impact that will occur during the transition away from carbon-based fuel sources, the group said.

"Most employees across the nation are unaware their retirement plan investments are profiting from environmentally and socially risky companies," As You Sow said in the report. "The financial risks include stranded assets, reputational risk, and other negative impacts of unsustainable business practices that can destroy shareholder value."

As You Sow plans to review the retirement plans of additional S&P 500 companies soon and will conduct targeted outreach to educate those employees and plan administrators about ESG investing.

Neither Amazon nor Comcast responded to a request for comment.

Andrew Behar, president of As You Sow, said he’s had mostly productive discussions with many corporate leaders about offering employees ESG options in their 401(k)s as part of their holistic mindset toward long-term sustainability. He anticipates more openness to embracing the movement, he said.

With ESG investing rapidly gaining a foothold with Wall Street and Main Street investors, Republican lawmakers have opposed the consideration of these factors by corporate boards, preferring instead that businesses stick to more traditional profit-seeking functions.

The Thrift Savings Plan, the retirement vehicle akin to a 401(k) for federal workers, said it will allow participants to select ESG options starting next year. Sens. Patrick J. Toomey of Pennsylvania, the ranking Republican on the Senate Banking Committee, and Ron Johnson, R-Wis., questioned in a June 30 letter to the Federal Retirement Thrift Investment Board if third party managers of TSP funds are unduly influencing the growth of ESG considerations in the TSP and if that violates a legal mandate to focus on financial returns.

Proponents of the ESG movement have been increasingly tying climate and social risks to a company’s long-term financial performance. They say these considerations are within plan administrators’ fiduciary duty to maximize gains and mitigate risks, in a head-on challenge to the premise of Republican opposition.

"We have decades of evidence showing a positive correlation between companies with strong ESG characteristics and financial return," Matthew Patsky, CEO of Trillium Asset Management, said in a statement. "It is irresponsible and a clear violation of fiduciary duty for companies to not provide robust ESG options in their 401(k) plans."

This report has been corrected to accurately reflect concerns raised by Toomey and Johnson in a June 30 letter to the Federal Retirement Thrift Investment Board.

This report was also corrected on Aug. 9 to accurately portray the findings of a report by As You Sow regarding 401(k) plan assets in funds that do not normally consider sustainability factors.