The Final ESG Rule: What Happened?
A funny thing happened on October 30th when the Department of Labor issued what was to be its final ESG Rule, after the proposed rule was issued on June 23rd. The final rule, which was only eight pages long (after 140 pages of responses to comments from the public), contained no mentions of the term ESG. What was even more astounding was that the term was mentioned nearly 146 times in the 62-page proposed rule. So, we went from 146 mentions to zero, which is reflective of the softening of the DOL’s position on the proposed rule, viewed by many as anti-ESG.
Why did this happen? The DOL received over 1,100 written comments and 7,600 form letters from the public regarding the proposed rule, 95% of which were reported to be critical. The DOL has always publicly stated that they take public comments seriously, and there is perhaps no clearer example than the changes that were made from the proposed rule to the final rule. The DOL acknowledged that “ESG terminology was not appropriate as a regulatory standard,” due to “the lack of a precise or generally accepted definition of “ESG,” either collectively or separately as “E, S, and G.”
Among other changes, the final rule eliminated a particularly controversial provision in the proposed rule that would have specifically prohibited the use of an ESG fund as a Qualified Default Investment Alternative (QDIA). However, the DOL still prohibits the use of an investment as a QDIA if its objectives, goals or principal investment strategies include, consider, or indicate the use of one or more non-pecuniary (non-financial) factors.
Like the proposed rule, the final rule prohibits sacrificing investment return or taking on additional investment risk to promote non-pecuniary goals. However, unlike the proposed rule, it does not single out ESG or ESG-related investments as funds that promote non-pecuniary goals.
The watering down of the final ESG Rule is welcome news to many retirement plan sponsors and those who work with them, as the proposed rule was generally viewed as a heavy-handed “solution” to a problem that barely existed in the defined contribution retirement plan marketplace, as only two-tenths of one percent (0.2%) of all plan assets are currently invested in ESG options.
As it stands, this rule is scheduled to become effective 60 days after the date it is published in the Federal Register, though there is a special provision that allows plans until April 30, 2022 to make any necessary QDIA changes to comply with the final rule. Given the watering down of the rule, it is probably more likely to become effective as written than was the case with the Fiduciary Rule.
Do you think that the DOL sufficiently softened its position on ESG in the Final Rule - or does the rule remain too anti-ESG for your liking? Let us know on LinkedIn, Twitter, or at email@example.com.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Opinions expressed are those of the author, and do not necessarily represent the opinions of Cammack Retirement Group.
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