The wind turbines are operating at the Gouda wind farm next to a twilight road in Gouda, South Africa, on Wednesday, March 3, 2021.
Dwayne Senior / Bloomberg via Getty Images
Increasing ESG
Investor demand for ESG funds has risen sharply in recent years.
Investors poured $ 51.1 billion of new net money into such funds in 2020, a record even more than double the previous year, according to Morningstar.
Such funds can invest, for example, in energy companies that do not depend on fossil fuels or in companies that promote racial and gender diversity.
Money managers also offered new ESG funds to investors. The number of sustainable funds available to U.S. investors rose to nearly 400 last year – up 30 percent from 2019 and nearly fourfold over a decade, according to Morningstar.
Trump’s rule
However, a small percentage of workplace retirement plans provide ESG funding.
About 3% of 401 (k) plans have an ESG fund, according to the Plan Sponsor Council of America. Part of the plan’s assets (one tenth of 1%) are held in such funds.
Retirement plans at work – one of the largest wealth vessels in America – are a huge untapped source of growth.
The Department of Labor measure does not explicitly require or directly prohibit ESG funds in 401 (k) plans. But it could already prevent light-free absorption, according to experts.
The Trump-era rule requires employers – who make decisions around 401 (k) investments – to consider only factors such as the risk and return on a fund (rather than characteristics such as social or environmental good) when choosing 401 funds ( k). Otherwise, employers may request more legal scrutiny.
The Department of Labor has also explicitly banned employers from automatically enrolling workers in an ESG-focused fund. Automatic enrollment has become an increasingly popular way to push workers to invest in a 401 (k).