Report : DC Retirement | November 10, 2021

How new guidance affects evaluation of ESG funds

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A proposed regulation regarding the use of environmental, social, and governance (ESG) factors would make important changes to the rules on the use of ESG factors in retirement plans.

Issued by the U.S. Department of Labor (DOL) on October 13, 2021, the proposed regulation seeks to recognize the important role that ESG investing can play in the evaluation and management of plan investments while continuing to uphold fundamental fiduciary obligations. It still requires that investments be made in the financial best interest of plans. But the proposed regulation specifically states that the evaluation of the risk/return characteristics (the financial factors) of an investment may often require a consideration of the economic effects of climate change and other ESG factors. That is, it supports the inclusion of ESG as a financial factor (and suggests it's a risk not to).

Fiduciaries who plan to implement an ESG strategy must continue to follow a diligent and documented process while demonstrating good fiduciary hygiene with respect to prudence and ensuring decisions are made in the best interest of participants. These practices are long-standing and universal.

To help support many of the inquiries we receive from plan sponsors and their advisors, we are pleased to issue the second in a three-level framework to help sponsors navigate the fiduciary landscape related to their consideration of ESG options.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
  • ESG funds are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the index provider for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other funds screened for ESG criteria. The index provider's assessment of a company, based on the company's level of involvement in a particular industry or the index provider's own ESG criteria, may differ from that of other funds or of the advisor's or an investor's assessment of such a company. As a result, the companies deemed eligible by the index provider may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics. The evaluation of companies for ESG screening or integration is dependent on the timely and accurate reporting of ESG data by the companies. Successful application of the screens will depend on the index provider's proper identification and analysis of ESG data.