/Labor Department Curbs Sustainable Investing in 401(k)s – The Wall Street Journal

Labor Department Curbs Sustainable Investing in 401(k)s – The Wall Street Journal

The Department of Labor adopted a final rule that could curb investing in 401(k)s based on environmental and social issues.

First proposed in June, the rule published Friday requires that funds in retirement plans only consider risk-and-return for stocks and bonds—and not environmental or social issues.

“This rule will ensure that retirement plan fiduciaries are focused on the financial interests of plan participants and beneficiaries, rather than on other, non-pecuniary goals or policy objectives,” said Labor Secretary Eugene Scalia.

Still, a senior department official said funds that consider environmental and social issues could be allowed if managers document how the strategy benefits the core risk-and-return objective.

“This does not mean that fiduciaries are prohibited from considering such issues as environmental impact and workplace practices,” the official said.

There could be also “rare circumstances” that an investment with environmental or social goals is indistinguishable economically from a competing option. In those cases, a fund manager could weigh those factors but must show how the financial interests of savers aren’t sacrificed.

The Department of Labor regulates retirement plans through the Employee Retirement Income Security Act of 1974.

The measure was opposed by money managers who are building out environmental, social and governance funds to meet rising demand. Only one of the 86 asset managers who sent letters over the 30-day comment period supported the rule, according to an analysis by US SIF: The Forum for Sustainable and Responsible Investment and other organizations.

Many said the proposal singled out sustainable investments unfairly for heightened scrutiny. “The proposal creates an overly prescriptive and burdensome standard,”

BlackRock Inc.,

the world’s largest money manager, said in its comment to the department.

In 2018, 2.8% of 401(k)s offered a fund in their lineups that rewarded companies with strong environmental, social and governance performance—known as ESG—suggesting a largely untapped market for fund managers, according to the American Retirement Association’s Plan Sponsor Council of America. Sustainable funds, typically based on data that companies report, are still sparse in retirement plans, but big money managers—like Fidelity Investments Inc. and

Natixis SA

—have said they want to offer more of the funds to savers.

Despite the novelty of sustainable investments in 401(k)s, individual investors are buying into the funds. In the third quarter of this year, the U.S. saw a record $9.8 billion flow into sustainable funds, bringing total assets to $179.1 billion.

Analysts said the rule could be reversed, depending on the outcome of next week’s presidential election. “The ESG pendulum appears to swing based on which political party occupies the White House,” said Vadim Avdeychik, a lawyer specialized in investment management at Paul Hastings LLP.

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