Trump Administration Targets ESG Funds With 401(k) Rule

One in four of every professionally invested U.S. dollar is tied to environmental, social and governance criteria. But the Trump administration’s latest proposed rule change may make it harder for ESG funds to attract interest from retirement plans.

On June 23, the Labor Department led by Secretary Eugene Scalia proposed an update to the Employee Retirement Income Security Act of 1974 (ERISA) that would require those overseeing pension and 401(k) plans to always put economic interests ahead of “non-pecuniary” goals. The agency specifically called out ESG investing in its proposal.

“After years of the Department of Labor having varying degrees of guidelines about if you can consider ESG factors, they are coming out definitively to say it’s not appropriate to consider,” said attorney Josh Lichtenstein, a partner in Ropes & Gray’s ERISA practice. That means that fiduciaries of pension and 401(k) plans could be forced to prove they selected investments based only on economic criteria. “This could actually make it harder for a fund that is advertising as an ESG fund to be selected by these types of plans, even when the selection is truly based on investment performance,” Lichtenstein said.

The move could also create confusion for asset managers throughout the market who have increasingly incorporated ESG into their decision making. Indeed, while ESG investments have been increasingly outperforming, and thus justifiable both on financial and planet-friendly levels, new red tape created by the Trump administration rule may dissuade fiduciaries from incorporating them.

“This is utterly out of step with where investors are going,” said Lisa Woll, chief executive of the US SIF Foundation, an industry group for sustainable and responsible investing. The organization said more than $12 trillion in U.S. assets are now invested in funds that incorporate ESG criteria.