The Department of Labor (DOL) released on October 13, 2021, a Notice of Proposed Rulemaking on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (Proposed Rule), which would amend a prior regulation (the 2020 Rule). This blog post provides a high-level summary of the Proposed Rule and outlines how it may affect environmental, social, and governance (ESG) investing for ERISA plans.
Overall, if finalized in its current form, the Proposed Rule should provide comfort to ERISA plan fiduciaries seeking to incorporate climate change and other ESG factors into plan investment decisionmaking and plan fund lineups by (a) treating climate change and other ESG factors like the myriad of other considerations that may be material to investment value/risk-return; (b) allowing investments selected to serve as qualified default investment alternatives (QDIAs) to incorporate climate change and other ESG considerations and (c) expanding the application of the “tie-breaker” doctrine from prior guidance.
This Proposed Rule is the most recent volley in a 25-year-long game of regulatory ping-pong with respect to the use of ESG factors in making investment decisions for ERISA plans and successive DOL administrations altering interpretations. For instance, the 2020 Rule, released by the DOL under the prior administration, imposed new standards related to the use of ESG by ERISA plans. It was largely seen as cautious (if not negative) on the use of ESG factors in investment decisions by ERISA plan fiduciaries.
The Proposed Rule would amend the 2020 Rule—and the DOL’s legal interpretation—in three important ways:
Of course, our study and analysis of the Proposed Rule will continue, and we hope to publish a more in-depth analysis in the coming days.
Law clerk Rachel Mann contributed to this post.