Sustainable retirement options may be coming your way

A recent Department of Labor ruling makes it easier for plan sponsors to consider climate risk.

By Asiyah Choudry

Last Updated: March 21, 2023

Originally Published: December 21, 2022

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Update: March 2023 

On March 20, 2023, President Joe Biden issued his first presidential veto repealing Senate resolution H.J. Res. 30, as promised. The Senate resolution blocked the recent Department of Labor (DOL) ruling that would have allowed retirement plan fiduciaries to consider ESG factors when selecting retirement investments. Opposition to the DOL ESG rule is part of broader resistance by some political factions to consideration of ESG factors in investment decisions.


The Biden administration stands by the DOL ESG rule stating in Biden’s veto message: "Retirement plan fiduciaries should be able to consider any factor that maximizes financial returns for retirees across the country. That's not controversial — that's common sense." 


The DOL ESG rule returns to Congress for reconsideration this week. However, opposition to the rule is unlikely to receive the two-thirds vote required to overturn the veto. The now-probable passing of the DOL ESG rule will enable fiduciaries to consider the full range of risks facing retirement options, including climate-related financial risk.


Original publication: December 2022

At the end of 2022, the Department of Labor (DOL) announced a new rule, allowing retirement plan fiduciaries to consider environmental, social, and governance (ESG) factors when selecting retirement investments. The ruling reverses Trump-era amendments to the Employee Retirement Income Security Act (ERISA), which required fiduciaries to select retirement investments based solely on financial factors.

What is covered in this article:

What is the DOL ESG Rule?

Did you know that your retirement savings may be contributing to climate change? Until now, there hasn’t been clear regulatory guidance on sustainable retirement offerings. Last year the Biden administration proposed changes to ERISA that would provide much-needed clarity regarding the consideration of ESG factors in the selection of retirement investments.


The rule takes effect on January 30, 2023, and includes the following changes:

Permits consideration of ESG factors

Fiduciaries can consider factors that are “relevant to a risk and return analysis” including “the economic effects of climate change and other environmental, social, or governance factors…”.

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Removal of special rules for default retirement options

Previously if a fund had any non-financial objectives, it would not be eligible as a default retirement option (referred to as a Qualified Default Investment Alternative (QDIA) in ERISA). Under the new rule, as long as a plan fiduciary focuses on relevant risk and return factors, funds incorporating ESG considerations can be QDIAs.

Collateral benefits can be tiebreakers

Fiduciaries are permitted to use “collateral factors” (such as environmental, social, or governance factors) as a tiebreaker when deciding between two financially prudent investment options.

How this affects your retirement savings

The ruling doesn’t require that plan sponsors incorporate ESG data into the investment selection process. It simply gives the green light for plan sponsors to consider ESG data alongside other financial metrics when evaluating risk and return.

In addition, these amendments don’t lower the bar for investments included in a retirement plan. Fiduciaries are still expected to act in the best interest of plan participants by selecting financially prudent investments. The incorporation of non-traditional, financially material data like climate risk will enable plan sponsors to execute this mandate more effectively. The Swiss Re Institute estimates that by 2050, 10% of global economic value will be lost due to climate change. A good retirement plan should take this information into account.

White wind turbines over hills

In fact, many institutions are already incorporating climate risk data in their investment decisions. According to Alex Wright-Gladstein, Founder & CEO at Sphere, which offers a climate-friendly 401(k), “Institutions including the Rockefeller Foundation, the New York State Pension Fund, and the Harvard Endowment have already exited the fossil fuel industry, often citing worrying economic factors and a need to protect long-term value as a driving force for decisions.”

The need for sustainable retirement options

The market share of ESG-related assets is on an upward trajectory. By 2026, PwC estimates that ESG assets will compose 21.5% of managed assets globally. The growth of ESG funds reflects growing investor demand for companies to become better environmental and social actors. This demand extends to retirement plan offerings. A 2022 Schroders US Retirement Survey found that 87% of plan participants want their retirement investments to align with their values. Furthermore, 74% of participants said they might increase their contribution rate if ESG options were available.


Wright-Gladstein has witnessed the demand for climate-friendly retirement solutions firsthand through her work at Sphere. “We have seen a lot of demand for climate-friendly retirement solutions…It's no surprise when you see the data - over 80% of Americans are worried about climate change. One-third of investment dollars globally are in values-aligned strategies, but that number is below 1% in corporate retirement plans. Clearly, there is pent-up demand.”

The new DOL rule enables fiduciaries to make decisions in the best interest of plan participants using all available information. According to Secretary of Labor Marty Walsh, the prior regulation had a “chilling effect” on retirement plan selection by restricting fiduciaries' ability to consider non-pecuniary information that could materially affect financial performance. There is evidence to suggest that the evaluation of environmental, social, and governance information can positively affect returns in the long term.

Barriers to sustainable retirement plan adoption

We asked Zach Stein, co-founder of Carbon Collective, what he sees as the biggest barrier to the uptake of climate-friendly retirement solutions. Zach says, “It's the investment paradigm that fossil fuels are a good investment and necessary sector to invest in for a diversified portfolio. Until the last year when inflation helped drive oil prices, they have been a terrible investment over the last 10 years. Forward-looking, it's hard to see how they are going to expand their business model. Almost 50% of their market will be electrified due to superior technology. And there are policy headwinds. We believe that sustainable investing is just smarter investing.”

It’s also important to note that ESG isn’t synonymous with climate-friendly. Just because a retirement fund is ESG doesn’t mean it invests in climate solutions or excludes fossil fuel companies. Asset managers typically use ESG as a tool to manage risk rather than to drive positive environmental outcomes. In some cases, ESG is a marketing tool. In recent years, firms like Deutsche Bank have faced the consequences of greenwashing their products.

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Does your employer offer a sustainable retirement option?

So, is the Department of Labor doing enough to tackle the climate impact of retirement savings? According to Stein, “No, because it still leaves sustainable investing as something allowed, rather than the main paradigm that is offered. We'd love to see them mandate sustainable investment target date funds, but since they're not we'll continue to offer them to the companies smart enough to know that sustainable investing is smart investing.” 

The Department of Labor ruling is a first step in deploying a multi-trillion-dollar pool of retirement savings to drive a sustainable future. If you are a climate-conscious investor seeking to improve the sustainability of your portfolio, consider switching to an ESG 401(k) option. If your plan sponsor doesn’t offer sustainable retirement options, voice your preference to your HR department. With enough support, they may consider expanding their offerings to include a sustainable option.

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Are you an employer? Check out Carbon Collective and Sphere’s Sustainable 401(k)s.

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