The clock is ticking for the Biden administration to nullify Donald Trump’s restrictions on retirement plan fiduciaries, rules by which the Republican sought to limit their ability to direct money into environmental, social and governance funds.

Trump’s Department of Labor moved earlier this month to adjust the Employee Retirement Income Security Act of 1974 (ERISA) to require those overseeing pension and 401(k) plans to always put economic interests ahead of so-called nonpecuniary goals. It was seen as a direct attack on ESG and green investing (though they have become more profitable of late).

In response, several financial advisory firms have since taken steps to reduce the number of ESG-focused funds they deem appropriate for retirement investors.

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“The rule is already having a harmful effect,” said Jon Hale, head of sustainability research at Chicago-based Morningstar Inc. “Retirement fiduciaries and consultants are removing ESG funds from plans and from being considered for plans, at a time when these funds are more numerous than ever before, have outperformed traditional funds in recent years, and have attracted more flows from investors.”

Hale said he’s heard from a “large wealth manager” who’s narrowing the list of funds considered eligible for retirement plans based on Trump’s last-ditch decision. Hale added that “our own retirement management group at Morningstar is doing the same.”

Reversing the rule would be consistent with President Joe Biden’s stated objectives. Biden included the DOL’s “Financial Factors in Selecting Plan Investments” on his list of Trump climate-related agency actions that are up for review.

Biden has signed a slew of executive orders on environmental issues since he took office last week. These included a recommitment to the Paris climate agreement and a request that federal agencies review any and all Trump policies “that were harmful to public health, damaging to the environment, unsupported by the best available science or otherwise not in the national interest.”

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The  so-called ESG rule certainly falls into this category, Hale said. First, the Trump administration didn’t “listen to the science” in making its decision. They moved forward despite receiving overwhelming evidence about the efficacy of using ESG concerns to improve long-term risk-adjusted returns of investments in worker retirement plans. In particular, the Trump rule ignored all evidence that climate risk is financially material across a range of investments, he said.

Second, the Biden administration has said it will protect the environment and support policies that reduce greenhouse-gas emissions, among other things. “To preclude workers from investing for their retirement in funds that address these pressing issues as part of their overall fiduciary responsibility will harm workers’ ability to finance and enjoy their retirement,” Hale said.

In 2020, nine of the U.S.’s 10 largest ESG-focused mutual funds generated higher returns than the S&P 500 index by posting gains of at least 20%. The top performer was the $5.8 billion Putnam Sustainable Leaders Fund, which was up 28.5%, followed by the 27.9% advance of the $4.9 billion Aberdeen Emerging Markets Fund. While similar outperformance also occurred last year in Europe, whether these investment trends continue is anyone’s guess.

Bryan McGannon, director of policy and programs at US SIF, a Washington-based group that supports sustainable investment businesses, said the DOL should issue immediate guidance to clarify that ESG criteria is considered pecuniary and begin to re-write the rule. This would include allowing sustainable investments to be included in default plans, known as Qualified Default Investment Alternatives, McGannon said.

“The risk that retirement platforms are taking ESG products down from their offerings is a significant impact of the rule and underscores the urgency of fixing it,” he said. “Platforms delisting ESG plans is reversible if the DOL takes action in the relatively near term.”

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