In October, the DOL announced a proposed rule that would remove barriers to plan fiduciaries’ ability to consider social factors when they select investments. A previous rule proposed by the Trump administration essentially required fiduciaries to primarily consider financial factors when investing and limited when they could consider environmental, social and governance (ESG) factors. The Biden administration, however, has swung the pendulum back toward favoring ESG investments.
The Biden Administration’s proposed rule makes it clear that ESG factors themselves can be materially financial factors that fiduciaries can and should consider. Under the proposal, fiduciaries can treat ESG factors, such as climate change, as important factors that are directly related to the risk and reward of a certain investment. ESG factors are no different than other “traditional” material risk-return factors. Thus, if a fiduciary prudently concludes that a climate change or another ESG factor is a material consideration when analyzing an investment, the fiduciary can and should consider the ESG factor as it would consider any other material risk-return factor.