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Labor Department pushed to say whether retirement plans can use ESG factors

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Labor Department pushed to say whether retirement plans can use ESG factors

U.S. regulators overseeing retirement plans have yet to set clear guidance on how money managers can use environmental, social and governance strategies, leaving investment advisers reluctant to include ESG criteria in their portfolios.

Now, the U.S. Government Accountability Office is urging the Department of Labor to clarify its stance on ESG investing. In a May 22 report, the GAO said regulatory uncertainty has led retirement plan managers to avoid ESG factors in their strategies.

The report comes just weeks after the Labor Department issued a field assistance bulletin stating that investment advisers working on plans tied to the Employee Retirement Income Security Act of 1974 "must not too readily" put ESG factors ahead of economic interests when making a decision relevant to a particular investment choice.

"We appreciate [the Labor Department's] consideration of the need for additional information, particularly as some have noted the new field assistance bulletin could create a chilling effect that leads fiduciaries to avoid considering ESG factors that could address material risks in their investments, to the detriment of plan participants' best interests," Charles Jeszeck, director of education, workforce and income security, wrote in the GAO report.

ESG investing has become an increasingly popular strategy among investors. A mounting number of retail and institutional investors have started to push companies, portfolio managers and investment advisers to steer clear of investments tied to companies not meeting certain standards related to ESG topics including climate change, gun ownership and gender pay gaps.

Investment advisers working on retirement accounts, who are legally bound to their clients' best interests when making an investment, have since found themselves at a crux. That legal obligation, overseen by the Labor Department, contrasts with the rising trend of ESG investing, which some investors and advocates claim will bring larger payoffs in the long run.

The Labor Department "neither agreed nor disagreed with [GAO's] recommendations," according to the report, which added that the Labor Department is weighing steps to begin collecting data on how retirement plan managers use ESG factors.

"At this point, we believe it would be appropriate to evaluate the public reaction to your report and the [field assistance bulletin] before reaching any conclusions about the necessity or appropriateness of issuing further guidance in this area," Labor Department Assistant Secretary for the Employee Benefits Security Administration Preston Rutledge wrote in a letter included in the GAO report.

A Labor Department spokesperson did not respond to a request for comment on the GAO report.