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Point of View · 12.21.22

ESG Investing Takeaways from the U.S. Department of Labor Ruling

What the rule means for retirement plan sponsors, and some possible next steps

  • Markets & Economy
  • Sustainable Investing (ESG)
  • Retirement

Key Points

What this is

We discuss the U.S. Department of Labor ruling on the use of investment strategies that leverage environmental, social and governance (ESG) data.

Why it matters

The ruling provides critical clarity on how sponsors can incorporate ESG analytics and sustainable investing strategies into their plan designs.

Where it's going

We think the rule confirms that sponsors can consider ESG issues financially material, allowing them to integrate ESG into their retirement platforms.

The U.S. Department of Labor published a rule last month on the use of investment strategies that leverage environmental, social and governance (ESG) data for retirement plans under the . We think the rule confirms that can consider ESG issues material to financial performance, paving the way to integrate sustainable investing into their retirement platforms. 



Key Takeaways


The ruling provides critical clarity to retirement plan sponsors on how they can incorporate ESG analytics and sustainable investing strategies — or strategies that base investment decisions on ESG criteria — into their plan designs. The new rule:


  • Affirms that the selection of ESG investment strategies is aligned with ERISA’s fiduciary duties of prudence and loyalty. Further, the rule says that ESG analytics can be used to evaluate material investment issues.
  • Affirms that sustainable investment strategies can perform competitively. However, the rule adds that plan sponsors should avoid using sustainable investing strategies that reduce returns or increase risk compared to similar non-ESG strategies.
  • Confirms that plan administrators have freedom to include how material ESG issues may affect investments in the same manner they would consider any other materially relevant information.


The rule permits plan sponsors to consider ESG criteria when designing their retirement platforms, without mandating it. The rule also allows plan sponsors to use sustainable investment strategies as qualified default investment alternatives, or automatic investments for plan participants who don’t specifically choose other options.



What's Next For Retirement Plan Sponsors?


Plan sponsors have 60 days to implement the new rule, after it is published in the Federal Register. As plan sponsors think about integrating sustainable investing into their plans, here are some ideas to consider.


  • Create a sustainable investing philosophy to guide decision-making on incorporating ESG into the retirement platform. Plan sponsors may want to draw from common standards such as the and recommendations of the .


  • Assess the retirement platform for ESG risk exposures, such as physical risks or business transition risks related to climate change. Whether intended or not, all investment vehicles have exposure to material ESG issues. Plan sponsors may start by assessing the ESG risk exposures across their existing fund lineup. This may help understand how the funds align with a plan’s sustainable investing philosophy. 


  • Incorporate the sustainable investing philosophy into the process of choosing investment strategies. Key to this is understanding how to integrate ESG considerations into the investment process, in areas such as asset allocation, manager selection and monitoring performance. 


Additionally, we see plan sponsors encouraged by the opportunity to plan participant outreach and education to potentially foster greater engagement. 



A Modern Approach To Investing


Importantly for plan sponsors, we think the ruling acknowledges that ESG issues are investment-relevant business issues, consistent with the long-understood ERISA tenet that fiduciaries should focus on the financial interests of a plan’s participants and beneficiaries. Our sustainable investing  philosophy is deeply rooted in economics and financial materiality, anchored by three principles:


  • ESG considerations are pre-financial indicators. When managed well they can position a company for success, and when mismanaged they can result in significant risks. 


  • ESG considerations enhance our forward-looking view of risks and opportunities. This analysis bolsters our ability to future-fit portfolios and grow clients’ capital. 


  • ESG considerations — coupled with stewardship to raise ESG standards with portfolio companies — support long-term financial performance and meet our fiduciary duties in seeking to provide strong long-term investment performance to our clients.


We think this approach gives plan sponsors the opportunity to choose resilient and robust portfolios consistent with participants’ long-term investment and retirement objectives.

Main Point

Investment relevant business issues

The rule permits plan sponsors to consider ESG criteria when designing their retirement platforms, without mandating it. It acknowledges that ESG issues are investment-relevant business issues, consistent with the long-understood ERISA tenet that fiduciaries should focus on the financial interests of a plan’s participants and beneficiaries.

Sustainable Investing (ESG)

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About Sustainable Investing

At Northern Trust Asset Management (NTAM), we define Sustainable Investing as encompassing all of NTAM’s investment strategies and accounts that utilize values based and norms based screens, best-in-class and Environmental, Social & Governance (ESG) integration, or thematic investing that may focus on a specific ESG issue such as climate risk. NTAM’s Sustainable Investing includes portfolios designed by NTAM as well as those portfolios managed to client-defined methodologies or screens. As the data, analytical models and aforementioned portfolio construction tools available in the marketplace have evolved over time, so too has NTAM. NTAM’s Sustainable Investing encompasses strategies and client assets managed in accordance with client specified responsible investing terms (historically referred to as Socially Responsible), as well as portfolios that leverage contemporary approaches and datasets, including ESG analytics and ESG thematic investing.


Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.


Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.


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