New Rule Would Allow ESG Considerations for Retirement Plans

Earlier this month, the US Department of Labor (“DOL”) issued a proposed rule that would reverse their own 2020 interpretation of the fiduciary investment rules.  The proposed rule would allow fiduciaries managing the investments for retirement plans to choose investments while also considering environmental, social, and governance (“ESG”) factors.

The DOL’s earlier 2020 guidance stated that “ERISA plan fiduciaries might be making improper investment decisions” by considering ESG factors and that such considerations potentially “subordinated the interests of plans and their participants to unrelated objectives” (i.e., the ESG factors). Essentially, the prior rule presumed that all ESG factors were adverse to financial factors and the fiduciary duties of fiduciaries, and therefore plan fiduciaries could not make investment decisions based on ESG factors that are not primarily “pecuniary in nature.” The new proposed rule is effectively a repudiation of this prior interpretation.

The new rule aligns with the White House’s Executive Order 14030 ("Climate-Related Financial Risk") which asks federal agencies to protect financial stability and pensions from the financial risks related to climate change. The proposed rule states that the duty of prudence when evaluating investment may require the review of climate change’s impact on financial markets and rates of return.  The new proposal permits fiduciaries to consider these factors, and other ESG related factors, when evaluating investments without fear of breaching their fiduciary obligations.

The proposed rule keeps the prior language that requires a fiduciary to consider how an investment or course of action compares to alternative investments or courses of action.  In addition, the new proposal reiterates the DOL’s policy that a fiduciary may not subordinate the interests of the plan or participants to other objectives, and, while other factors may be considered when choosing investments, the fiduciary may not choose those factors over investment return or take additional investment risk to promote objectives not shared by the plan or its participants.  However, the newly proposed rules eliminates the prior use of “pecuniary factors,” and confirms that consideration of all material factors is consistent with ERISA’s duty of loyalty.

The proposed rules appears to try and balance protection of participants and a fiduciary’s need to evaluate all factors related to an investment.  The DOL continues to emphasize that there is no substitute for prudent decision making by fiduciaries but admits that the prior rule may have been too prohibitive. It is hoped the new rule will make such decisions easier for fiduciaries while not harming plans or their investments.

If you should have any questions about this new rule, or any employee benefits related question, please contact any of Graydon’s employee benefits team.

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