Dating back to 1994 the Department of Labor has issued guidance in regards to fiduciaries considering inclusion of ESG (environmental, socially responsible, or governance) directed investments in ERISA plans. Though the perspective may have changed from administration to administration a few elements always remained constant: fiduciaries should not sacrifice opportunity for return or take on additional risks, they should not subvert economic goals to noneconomic policies, they must comply with the duties of loyalty and prudence, and in instances where “all things being equal” among investment options they could use collateral considerations to serve as tie-breakers.
In October of 2020, the Department of Labor (DOL) announced a final rule titled “Financial Factors in Selecting Plan Investments” (effective January 12, 2021). The rule stated that such decisions must be based solely on pecuniary factors (factors expected to have a material effect on risk and/or return). Fiduciaries were tasked to properly weight all factors. At the time the new rules were released the DOL stated that “ESG investing raises heightened concerns under ERISA,” but they also stated that ESG funds are not expressly forbidden in ERISA plans if they pass muster from a pecuniary perspective. Non-pecuniary factors (such as ESG elements) could be utilized as a tie-breaker if fiduciaries are unable to distinguish between two investments based on pecuniary factors alone. In these rare instances where non-pecuniary criteria are applied, fiduciaries were required to document how they fulfilled their responsibility to act in the best interest of plan participants. Plans were also precluded from offering ESG funds as their QDIA under these rules. And a separate set of rules were issued governing fiduciaries’ actions in regards to investment voting rights. Without commenting from a political stance, it was relatively clear that the rule manifested the prior administration’s skepticism of ESG investing.
In March of 2021 the current administration put in place a nonenforcement policy on those 2020 rules, and on October 13, 2021 issued new proposed rulemaking regarding “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights.” Though these regulations are merely in proposed form and open to a comment period, it is worthwhile to understand the changes that are contemplated therein for fiduciaries.
The following is a high level review of what is contained in the rulemaking:
