DoL’s new ESG rule takes finger ‘off the scale’

June 8, 2023

The US Department of Labor’s new ESG rule does not tip the balance in favour of ESG investing, according to officials within the department.

The rule, 'Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,' allows retirement plan fiduciaries to consider ESG factors when making investments.

Critics have claimed this would force fiduciaries to ignore financial indicators in favour of ESG factors.

However, Ali Khawar, principal deputy assistant secretary of the Labor Department's Employee Benefits Security Administration, said today that the new rule merely took the finger ‘off the scale’, as it is a reversal of two rules disseminated late in the Trump administration.

While the new rules encourage fiduciaries to consider policies which protect against the threats of climate-related risk, this has not been introduced as a legal requirement.

Khawar said the Trump-era rules caused a "chilling effect" for considering ESG factors, with rules introduced that limited fiduciaries’ from selecting investments based on non-financial factors.

The old rules stated they could not invest in "non-pecuniary" vehicles that disadvantage investment returns or take on additional risk. They outlined a process a fiduciary must undertake when making decisions about casting a proxy vote.

He said: “A lot of people were telling us that the Trump administration put their thumb on one side of the scale. Our solution was not then to put a thumb on the other side of the scale but instead to take our finger off the scale entirely.

He added: “It is up to the investment decision maker to decide what is appropriate in any given circumstance."

The rule has faced heavy pushback from Republican state officials and members of Congress this year.

Khawar’s statement comes after President Biden issued the first veto of his presidency back in March on legislation to invalidate the ESG rule.