The challenges we face to address climate change are daunting. So are the challenges Americans face to save for retirement. A recently released proposal from the Department of Labor takes a bold new approach to retirement plan regulation that addresses both of these challenges.
The fiduciary rules that determine how retirement assets are invested are critical to Americans’ retirement security. The government, through these rules, places important duties on the fiduciaries responsible for retirement plans to act with prudence and in the best interest of plan participants. For too long, though, these rules and their interpretation have limited the ability of retirement plans to consider environmental, social, or governance (ESG) factors in evaluating and making decisions on investments, including which investment options are offered to retirement plan participants. While ESG factors are increasingly recognized today as important elements in evaluating risks and maximizing long-term investor returns — potentially leading to bigger nest eggs for retirees — US rules have discouraged retirement plans from investing in ESG funds. Given the inherent long-term nature of retirement investment, this limitation has in effect prevented retirement savers from considering important long-term factors such as climate risk in retirement investment choices.
Thankfully, this limitation may be ending. The Department of Labor, which is responsible for regulating private sector pension plans, has proposed forward-thinking new rules that will significantly increase the ability of retirement plans to consider ESG factors as part of their investment process.
The proposal is great news for retirement savers. It will ensure that ESG risks are considered by retirement plan sponsors and investors as they choose plan investments. And, the proposed regulation should result in new options for retirement investing that recognize the wide variety of factors driving shareholder value, including climate and other sustainability factors, while fully protecting plan participants, as required by federal pension laws.
It is encouraging news for the environment too. We already are seeing the devastating impact of climate change, and we owe it to future generations to address the challenge now, before it is too late. Our only option is to commit across society to dramatically reduce release of greenhouse gasses — building a net zero economy — by mid-century. This will require careful stewardship of existing capital as well as the deployment of new capital in attractive climate-friendly investments. Rethinking our approach to investing is critical to that effort, and many investment funds seeking to maximize long-term value for investors are adjusting investment strategies accordingly. Up to now, retirement plans and investors have been forced to the sidelines. The Department of Labor’s new approach will allow the holders the $12 trillion in US retirement savings assets to consider climate investment risks and opportunities.
I applaud the Department of Labor and Secretary Marty Walsh for taking this important action. It will improve the retirement security of Americans as well as the environment.
Ron O’Hanley is chairman and CEO of State Street Corp.