The bulletin also said Labor's longstanding view is that plan fiduciaries may not sacrifice investment returns in selecting an ESG investment to promote those funds' "collateral social policy goals."

That Trump administration guidance tempered what was viewed as more favorable guidance for ESG adoption in qualified retirement plans issued in 2015 under the Obama administration.

The Obama-era guidance permitted plan fiduciaries to use ESG funds' collateral policy goals as "tie breakers" when selecting one fund over another, so long as the two funds have equal risk and return profiles.

A 3-decade long debate

The debate over ESG investing and its compatibility with plan sponsors' fiduciary obligations under the Employee Retirement and Income Security Act goes back to 1994 and was also addressed in 2008 under the George W. Bush administration.

As ESG investing in corporate and public retirement plans has grown, so has the Labor Department's interest in issuing fiduciary guidance for ESG incorporation; and so has the spread in interpretations from Democratic and Republican administrations.

A study commissioned by the Labor Department at the end of the Obama administration, and completed in 2017 after Trump's election, shows that by 2016, 30 percent of corporate defined contribution and defined benefit retirement plans offered or held ESG investments.

About 24 percent of defined contribution plans offered ESG investments, according to the study.

Public pensions have been even more active, holding between $2.74 trillion and $4.72 trillion in ESG assets in 2016.

According to Morningstar, ESG funds realized $5.5 billion in flows in 2018, breaking record flows for the two previous years. Fund offerings totaled 351, a 50 percent year-over-year increase.

Legislation, not guidance, needed if DC sponsors are to buy in

While the momentum behind ESG investing in public pensions and outside of qualified retirement plans is considerable, adoption of the strategy in 401(k) plans has been relatively slack.

Data from Callan Associates shows only 16 percent of defined contribution plans offer a dedicated ESG investment option. And take-up rates are low, as the funds account for only 2 percent of plan assets when they are offered.

Ethan Powell, CEO of Impact Shares, the nation's first not-for-profit issuer of ESG ETF funds, does not expect ESG adoption within ERISA 401(k) plans to grow until Congress—not Labor and other regulators—creates clearer, more permanent guidance for plan fiduciaries.

"Adopting ESG in retirement plans is a fool's errand until we get some codification," Powell said in an interview.

"Until we have longer-term legislative guidance, it doesn't matter what DOL says," he added.

President Trump's executive order—the results of Labor's study are due in October—effectively telegraphed that fossil fuel-free portfolios are not consistent with sponsors' fiduciary obligations under ERISA, said Powell.

Impact Shares, a registered 501(c)(3), issues three ETFs traded on the NYSE. Powell says the funds address some critics of ESG funds that allege their existing criteria are too amorphous.

The firm's NAACP Minority Empowerment ETF, launched in July 2018, tracks the Morningstar Minority Empowerment Index, which is designed to provide exposure to U.S. companies with "strong racial and ethnic diversity policies in plans, empowering employees irrespective of their race and nationality," according to the fund's fact sheet.

It's offered for 76 basis points. Of that revenue, 50 basis points is returned to the NAACP after management costs are recouped, Powell said.

"Our social screens are publicly disclosed," said Powell, who said the fund is designed to engage discussion on best-in-practice policies, and not to browbeat companies that may not make the fund's list.

The actively managed fund has 220 holdings. Bank of America, BNY Mellon, Goldman Sachs, JP Morgan, Morgan Stanley, State Street, and Wells Fargo are among the financial services firm included in the fund. Several legacy energy companies are included as well.

Powell, who previously was the executive vice president of Highland Capital Management, says inroads into ERISA plans simply can't happen, absent changes in the law, given the heightened litigation climate and fiduciary risk employer plan sponsors must navigate.

"It won't matter what DOL says in October," he said. "The constant back and forth from administration to administration is tantamount to a 'no' vote from sponsors. We need to be proactive in codifying legislation instead of letting DOL sway depending on who is in office."

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