Labor Department finalizes U.S. rule curbing sustainable investing by pension funds

FILE PHOTO: The United States Department of Labor is seen in Washington, D.C., U.S., August 30, 2020. REUTERS/Andrew Kelly

NEW YORK/BOSTON (Reuters) - The U.S. Department of Labor on Friday finalized a rule clarifying that pension fund managers must put retirees’ financial interests first when allocating investments, rather than other concerns such as climate change or racial justice.

The move by the department under the administration of U.S. President Donald Trump came ahead of Tuesday’s election and represents the latest in a series of efforts to make it harder to use investment assets to address social issues.

Labor officials said that they made “significant changes” to the rule governing roughly $10 trillion in pension plan assets in response to over 1,000 comments they received, many critical.

The main change is that the final rule does not include references to so-called “ESG investing” or picking stocks for environmental, social or governance reasons, officials said. The rule focuses on pecuniary factors, which the department says have a “material” effect on the risk and return of an investment.

Net deposits into ESG funds have soared on growing interest from clients and strong performance, trends cited by critics of the new rule including large asset managers.

In its rulemaking, the Labor Department noted many ESG-themed funds have over-weighted technology and under-weighted energy stocks, suggesting their outperformance could be “merely correlated with broader economic trends unrelated to a specific ESG factor.”

Sanford Lewis, director of the Shareholder Rights Group, representing progressive investors who opposed the rule changes, said via e-mail that even as adjusted, the department is still “interfering with ERISA funds from integrating investment strategies consistent with beneficiaries’ values.”

Marg Franklin, CEO of the CFA Institute, a standard-setting group for investors, said the new rules ran counter to the growing use of ESG factors to judge investment returns and risks.

“The department’s agenda to block consideration of anything ESG-related in the investment management process is a political gag order,” she said.

Reporting by Jessica DiNapoli and by Ross Kerber; editing by Diane Craft