3986.02 / What developments have emerged regarding a fiduciary’s consideration of environmental, social and governance (ESG) issues in making investment decisions?

Late in 2020, the DOL finalized a rule that would limit consideration of environmental, social and governance (ESG) factors when retirement plan fiduciaries are selecting plan investments without violating their fiduciary duties. Plan fiduciaries are obligated to act solely in the interest of plan participants and beneficiaries when making investment decisions. Under the final rule, the DOL said that plan fiduciaries must select investments based on pecuniary, financial factors and that it would apply an “all things being equal test”--meaning that fiduciaries were not prohibited from considering or selecting investments that promote or support non-pecuniary goals, provided that they satisfy their duties of prudence and loyalty in making the selection. This rule was seen as limiting fiduciaries’ ability to consider ESG factors in investing. However, earlier in 2021, the EBSA announced that it would not enforce this Trump-era rule, so that plan fiduciaries may once again consider ESG factors in making investment decisions.

On November 22, 2022, the DOL released a new final rule on ESG investing. The rule retains many prior elements, yet is generally expected to make it easier for plan fiduciaries to consider ESG factors in determining investment strategy. According to the rule, a plan fiduciary’s determination with respect to an investment or investment strategy must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis. The DOL further states that the analysis should use appropriate investment horizons consistent with the plan’s investment objectives and should account for the funding policy of the plan established under ERISA. Under the final rule, however, fiduciaries will not be prohibited from considering collateral benefits aside from investment returns when there is an essential “tie” in the context of the investment analysis. Fiduciaries will also not violate their duty of loyalty merely because they take participant preferences into account when building their menu of otherwise prudent investment options. The new rule does not contain any separate standard for QDIAs.

This ESG investing rule continues to generate controversy, so practitioners should pay close attention to developments in this area.