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The Department of Labor has issued new proposed regulations that would revise the existing “investment duties” rules under ERISA. Specifically, the Department focused on environmental, social or governance (ESG) investing. In addition to considering the traditional financial performance of an investment, ESG investing also considers the ethical implications of an investment by evaluating its environmental, social, or governance impact. The proposed rules clarify that ERISA requires administrators of pension and 401(k) plans to prioritize financial interests ahead of any non-financial interests.
Specifically, the regulations state that ERISA’s duties of prudence and loyalty require that investments are evaluated based solely on financial factors that have a material effect on the investment’s risk and return. While the proposed rule suggests that it would be rare for an ESG investment to be financially indistinguishable from a non-ESG investment, ESG considerations could be used as a tiebreaker in such a case. If an ESG investment is found to be indistinguishable from an alternative investment, fiduciaries must specifically document how they came to that conclusion.
The rule faces pushback from Democratic lawmakers, including thirteen Senators that signed a letter to Labor Secretary Scalia that asserted that the rule “undermine[s] a powerful tool that leverages trillions of dollars a year to drive positive social change.” Financial powerhouses Fidelity Investments, BlackRock, T. Rowe Price, Morningstar, and Voya Financial, among others, also noted their opposition to the proposed regulations as overly burdensome and in conflict with best practices.
Comments on the proposed rule ended in late July, and therefore the DOL can proceed with publication of the rule, which would be effective 60 days after publication. However, because of the backlash, the DOL may also consider extending the comment period, withdraw the rule, or revise the rule.