I- Employees Are
Now Allowed To Place Their Retirement Savings in ESG-Compatible Investments
Charlie
Nelson, Voya Financial’s chief growth officer, believes the company’s menu
design will help them attract competitive candidates. Many younger people seek
ESG-informed retirement options.
Since
climate change impacts business profitability, investing in environmental
sustainability is a positive thing.
This is what
the new rules make easier, according to Ceres. It's easy to build a portfolio
with ESG investments— plus more than ever.
This is
because you have many ESG investment options.
And how to
build your portfolio. A Morgan Stanley Institute for Sustainable Investing
white paper from 2019 concluded that the performance of mutual funds and
exchange-traded funds was nearly the same as traditional funds from 2004 to
2018.
Both types
of funds invest in sustainable stocks and bonds.
Other
studies have shown that ESG investing outperforms traditional methods.
II- Employees Have
The Option To Receive a Financial Benefit If Their Retirement Plan Investments Do
Not Satisfy Certain ESG Criteria
Rules from
the Labor Department have added ESG funds to the list of considerations for
retirement account fiduciaries.
Regardless
of the requirement, a program trustee must still adhere to ERISA's core
standards.
They must
consider the risk-reward factors that determine key decisions.
Plan
trustees can't increase investment risk or decrease investment returns without
the benefit of the plan.
Confirming
that the rule reversal was needed in line with pension plan participants, the
Schroeder 2022 Survey of American Retirement noted American pensioners’
desires.
If
participants in a defined contribution plan don't have ESG investments
available to them or don't know if ESG investments are available, 74% say they
could increase their taxable contributions by choosing to use ESG options.
More than
401,000 member of the plan chose ESG investment options when offered.
Over nine
out of every ten members chose to invest in these options.
New rules
being considered by the U.S. Department of Labor would significantly alter how
investments are made.
Currently,
investment decisions made by fiduciaries are based on multiple factors related
to retirement income and financial well-being.
Some of
these rules would be changed in order to help fiduciaries make clearer
ESG-related investment decisions.
This change
would be appropriate since fiduciaries already have no discretion in choosing
investments unrelated to these factors.
Furthermore,
ERISA mandates that fiduciaries invest in prudence and fidelity when making
investments on behalf of their clients— which would not be possible if they
were allowed to choose investments based on non-ESG factors.
Since ESG
funds are treated as a separate asset class, there's no need for trustees to
create a "safe haven" for ESG investment and funding sources.
They can
simply add these funds to other 401(k) or 403(b) funds for additional coverage.
When
investing with the benefit of hindsight, trustees run the risk of making
investments that incorporate ESG principles if they underperform.
III- The Department
Of Labor Establishes Guidelines For The Consideration Of Environmental, Social And
Governance (ESG) Factors In Retirement Plan Investments
The US
Department of Labor reversed a Trump-era rule on Wednesday that restricted
trustees from considering environmental, social and governance factors when
making investment choices.
This was due
to the fact that Trump officials had considered these factors to be too much of
a risk.
The new rule
is considered final and was put in place by the Labor department.
It allows
trustees to consider climate change in their selection process. The Department
of Labor, or DOL, published a final rule on November 22 regarding the way
pension plan trustees must consider environmental, social and governance, or
ESG, factors when making investment decisions.
This was
needed to better align with ESG ideas. ESG, or environmental, social and
governance factors, are used by plan trustees to protect American employees.
The
Department of Labor proposed this rule in October 2021. This means that
trustees can consider ESF in their investment and voting decisions.
They can
also protect workers' rights through the exercise of their savings rights,
including the right to vote on shareholder resolutions and nominate trustees
for new board positions.
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