The Biden administration will not enforce the Trump-era ESG standard for 401 (k) plans

The Biden administration said Wednesday it will not enforce a rule issued by the Trump administration that makes it more difficult to provide environmental, social, and governance (or ESG) funds in 401 (k) plans.

ESG funds can, for example, invest in energy companies that do not depend on fossil fuels or in companies that promote racial and gender diversity. Investors invested a record $ 51 billion in ESG funds last year.

The Trump-era Labor Department rule, published in 2020, does not explicitly require or prohibit ESG funding in 401 (k) plans.

But, according to experts, it is possible that their adoption is already not very intense by changing the requirements for employers to select them as 401 (k) investments.

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In fact, the rule has already had a chilling effect on its inclusion, even in circumstances where the rules explicitly allow its use, Biden’s Labor Department said Wednesday.

“Accordingly, the Department intends to review the rules,” the agency said. This action may lead to a possible backslash or rewrite.

Until that guidance is published, Biden’s labor office will not enforce Trump-era rules, the Department said.

The views of the Biden Labor Office were guided by input from stakeholders such as asset managers, labor organizations, plan sponsors, consumer groups, service providers and investment advisers, the agency.

The Trump-era rule requires that entrepreneurs (who make decisions about 401 (k) investments) only consider factors such as the risk and return of a fund (rather than characteristics such as social or environmental good) to the time to choose 401 (k) background. Otherwise, employers may call for broader legal scrutiny.

The Department of Labor also explicitly banned employers from automatically enrolling workers in an ESG-focused fund. Automatic enrollment has become an increasingly popular way to encourage workers to invest in a 401 (k).

The Labor Office is reviewing the Trump-era rule according to an executive order issued by Biden in January, entitled “Protecting Public Health and the Environment and Restoring Science to Cope with the Climate Crisis.”

This order directs federal agencies to review regulations issued between January 2017 and 2021 that “are or may be incompatible with or present obstacles to” administrative policies on the environment and climate. In such cases, agencies may suspend, review, or terminate rules, depending on the Department of Labor.